Reported - U.S. Senate Banking, Housing and Urban Affairs ...

THE RESTORING AMERICAN FINANCIAL STABILITY ACT
Reported out of Committee March 22, 2010
Mr. Dodd, from the Committee on Banking, Housing, and Urban
Affairs, submitted the following
R E P O R T
[To accompany S.3217]
I. INTRODUCTION
II. PURPOSE AND SCOPE OF THE LEGISLATION
III. BACKGROUND AND NEED FOR LEGISLATION
IV. HISTORY OF THE LEGISLATION
V. SECTION-BY-SECTION ANALYSIS OF BILL
VI. HEARING RECORD
VII. COMMITTEE CONSIDERATION
VIII. CONGRESSIONAL BUDGET OFFICE COST ESTIMATE AND REGULATORY IMPACT
STATEMENT
IX. CHANGES IN EXISTING LAW (CORDON RULE)
X. MINORITY VIEWS
I. INTRODUCTION
On March 22, 2010, the Senate Committee on Banking, Housing, and Urban Affairs marked up and
ordered to be reported the ―Restoring American Financial Stability Act of 2010 (RAFSA).‖ RAFSA is a
direct and comprehensive response to the financial crisis that nearly crippled the U.S. economy beginning
in 2008. The primary purpose of RAFSA is to promote the financial stability of the United States. It
seeks to achieve that goal through multiple measures designed to improve accountability, resiliency, and
transparency in the financial system by: establishing an early warning system to detect and address
emerging threats to financial stability and the economy, enhancing consumer and investor protections,
strengthening the supervision of large complex financial organizations and providing a mechanism to
liquidate such companies should they fail without any losses to the taxpayer, and regulating the massive
over-the-counter derivatives market.
II. PURPOSE AND SCOPE OF THE LEGISLATION
FINANCIAL STABILITY
Title I establishes a new framework to prevent a recurrence or mitigate the impact of financial crises that
could cripple financial markets and damage the economy. A new Financial Stability Oversight Council
(Council) chaired by the Treasury Secretary and comprised of key regulators would monitor emerging
risks to U.S. financial stability, recommend heightened prudential standards for large, interconnected
financial companies, and require nonbank financial companies to be supervised by the Federal Reserve if
their failure would pose a risk to U.S. financial stability.
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The Federal Reserve would establish and implement the heightened prudential standards and would have
additional authority to require (with Council approval) a large financial company to restrict or divest
activities that present grave threats to U.S. financial stability. With respect to bank holding companies,
the heightened prudential standards would increase in stringency gradually as appropriate in relation to
the company‘s size, leverage, and other measures of risk for those that have assets of $50 billion or more.
This graduated approach to the application of the heightened prudential standards is intended to avoid
identification of any bank holding company as systemically significant. These heightened prudential
standards would also apply to the nonbank financial companies supervised by the Federal Reserve.
A new Office of Financial Research within the Treasury Department would support the Council‘s work
through financial data collection, research, and analysis.
When Treasury Secretary Timothy Geithner presented the Administration‘s financial reform proposal at a
Committee hearing on June 18, 2009, he highlighted several shortcomings of the current supervisory
framework that left the government ill-equipped to handle the recent financial crisis: overall capital and
liquidity standards were too low; regulatory requirements failed to account for the harm that could be
inflicted on the financial system and economy by the failure of large, interconnected and highly leveraged
financial institutions; and investment banks and other types of nonbank financial firms operated with
inadequate government oversight. 1 FDIC Chairman Sheila Bair testified on July 23, 2009 that the
―existence of one regulatory scheme for insured institutions and a much less effective regulatory scheme
for non-bank entities created the conditions for arbitrage that permitted the development of risk and
harmful products and services outside regulated entities….The performance of the regulatory system in
the current crisis underscores the weakness of monitoring systemic risk through the lens of individual
financial institutions and argues for the needs to assess emerging risks using a system-wide perspective.‖ 2
These and other witnesses at Committee hearings relating to the financial crisis and financial reform have
made the case for the type of framework established in this title to promote U.S. financial stability.
Treasury Secretary Geithner called for the creation of a council of regulators chaired by the Secretary to
identify emerging risks in financial institutions and markets, determine where gaps in supervision exist,
and facilitate coordination of policy and resolution of disputes. He argued for new authority for the
Federal Reserve to set stricter prudential standards for large, interconnected financial firms that could
threaten financial stability, including financial firms that do not own banks. 3 Federal Reserve Chairman
Ben Bernanke called for a new prudential approach focusing on the stability of the financial system as a
whole, with formal mechanisms to identify and deal with emerging systemic risks, and for more stringent
capital and liquidity standards for large and complex financial firms. 4 FDIC Chairman Sheila Bair
recommended establishing an interagency council that would bring a macro-prudential perspective to
regulation and set or harmonize prudential standards for financial firms to mitigate systemic risk. 5 At the
July hearing, SEC Chairman Mary Schapiro also testified in favor of establishing such a council with
similar membership and authorities. 6 Federal Reserve Board Governor Daniel Tarullo testified at the
same hearing that there was substantial merit in establishing a council of regulators to conduct
macroprudential oversight and coordinate oversight of the financial system as a whole. 7 Former
1 Testimony of Timothy Geithner, Secretary of the Treasury, to the Banking Committee, June 18, 2009
2 Testimony of Sheila Bair, Chairman of the Federal Deposit Insurance Corporation to the Banking Committee, July 23, 2009
3 Testimony of Timothy Geithner, Secretary of the Treasury, to the Banking Committee, June 18, 2009.
4 Testimony of Ben Bernanke, Federal Reserve Board Chairman, to the Banking Committee, July 22, 2009.
5 Testimonies of Sheila Bair, Chairman of the Federal Deposit Insurance Corporation, to the Banking Committee, May 6 and
July 23, 2009.
6 Testimony of Mary Schapiro, Chairman of the Securities and Exchange Commission, to the Banking Committee, July 23,
2009.
7 Testimony of Daniel Tarullo, Federal Reserve Board Governor, to the Banking Committee, July 23, 2009.
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Comptroller of the Currency Eugene Ludwig argued at a September hearing that no single regulatory
agency would be well suited to handle this function alone. 8
At a February 12, 2010 hearing, several witnesses spoke in favor of the creation of an independent
National Institute of Finance (Institute). While the Office of Financial Research (Office) would be
established in the Treasury Department under this title, the Office is very similar in key respects to the
proposed Institute. Like the Institute, the Office would support the council of regulators charged with
monitoring emerging risks to financial stability. The Office would not supervise financial institutions but
would have regulatory authority with respect to data collection. The Office‘s structure is modeled on the
proposed Institute, with two main components to fulfill its primary functions – the Data Center and
Research and Analysis Center. The structure and funding of the Office are intended to ensure that the
Office, like the Institute, would have the resources and ability to provide objective, unbiased assessments
of the risks facing the financial system.
ENDING ―TOO BIG TO FAIL‖ BAILOUTS THROUGH THE ORDERLY LIQUIDATION
AUTHORITY
Title II establishes an orderly liquidation authority to give the U.S. government a viable alternative to the
undesirable choice it faced during the financial crisis between bankruptcy of a large, complex financial
company that would disrupt markets and damage the economy, and bailout of such financial company that
would expose taxpayers to losses and undermine market discipline. The new orderly liquidation authority
would allow the FDIC, which has extensive experience as receiver for failed banking institutions,
including large institutions, to safely unwind a failing nonbank financial company or bank holding
company, an option that was not available during the financial crisis. Once a failing financial company is
placed under this authority, liquidation is the only option; the failing financial company may not be kept
open or rehabilitated. The financial company‘s business operations and assets will be sold off or
liquidated, the culpable management of the company will be discharged, shareholders will have their
investments wiped out, and unsecured creditors and counterparties will bear losses.
There is a strong presumption that the bankruptcy process will continue to be used to close and unwind
failing financial companies, including large, complex ones. The orderly liquidation authority could be
used if and only if the failure of the financial company would threaten U.S. financial stability. Therefore
the threshold for triggering the orderly liquidation authority is very high: (1) a recommendation by a two
thirds vote of the Board of the Governors of the Federal Reserve System; (2) a recommendation by a two
thirds vote of the FDIC; (3) a determination and approval by the Secretary of the Treasury after
consultation with the President, and (4) a review and determination by a judicial panel.
In order to protect taxpayers, large financial companies will contribute $50 billion over a period of 5 to 10
years to a fund held at the Treasury. This fund may only be used by the FDIC in the orderly liquidation of
a failing financial company with the approval of the Treasury Secretary, and may not be used for any
other purpose. The FDIC must first rely on these industry contributions if liquidity support is necessary
to safely unwind the failing financial company and prevent a ―fire sale‖ of assets that could further
threaten financial stability. The fund would help avoid damaging ―pro-cyclical‖ effects by allowing large
financial companies to contribute gradually when they can most afford to pay, not when a crisis has
already erupted. If additional liquidity is necessary, the FDIC may obtain financing from the Treasury but
only if such financing can be repaid by the proceeds of the assets of the failed financial company.
Additional assessments on large financial companies may be imposed if necessary to ensure 100 percent
repayment of any funds obtained from the Treasury, and any financial company that received payments
8 Testimony of Eugene Ludiwg, former Comptroller of the Currency, to the Banking Committee, September 29, 2009.
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greater than what it otherwise would have received in bankruptcy will be assessed at a substantially higher
rate. Taxpayers will bear no losses from the use of the orderly liquidation authority.
The Committee hearing record provides significant support for establishing an orderly liquidation
authority for large, complex bank holding companies and nonbank financial companies. On February 4,
2009, former Federal Reserve Chairman Paul Volcker gave the recommendations of the ―Group of 30‖
(an international body of senior representatives from the public and private sectors and academia dealing
with economic and financial issues), which included a call for U.S. legislation to establish a regime to
manage the resolution of failed non-depository financial institutions comparable to the process for
depository institutions. The recommendations called for applying this regime ―only to those few
organizations whose failure might reasonably be considered to pose a threat to the financial system.‖ 9 On
June 18, 2009, Treasury Secretary Timothy Geithner presented the Administration‘s financial reform
proposal, which called for a new authority modeled on the FDIC‘s existing authority for banks and thrifts
to address the failure of a bank holding company or nonbank financial company when the stability of the
financial system is at risk.
In testimony submitted on July 23 of 2009, FDIC Chairman Sheila Bair noted that large financial firms
have been ―given access to the credit markets at favorable terms without consideration of the firms‘ risk
profile….Investors and creditors believe their exposure is minimal since they also believe the government
will not allow these firms to fail.‖ In her July statement and in testimony on March 19 and May 6,
Chairman Bair discussed the limitations of current bankruptcy procedures as applied to large and complex
bank holding companies and nonbank financial companies, and advocated for a new statutory authority
for the credible orderly unwinding of such companies modeled on the FDIC‘s existing authorities.
Chairman Bair argued that the resolution authority must be able to allocate losses among creditors in
accordance with an established claims priority ―where stockholders and creditors, not the government, are
in a first loss position.‖ The testimony also discussed the merits of building up a fund over time in
advance of a failure to provide working capital or to cover unanticipated losses in an orderly liquidation. 10
This type of ―pre-funding‖ would enable the government to impose charges on large or complex financial
companies consistent with the risks they pose to the financial system, provide economic incentives for a
financial company against excessive and dangerous growth, and avoid large charges during times of
economic stress that would have undesirable ―pro-cyclical‖ effects.
In his July 23, 2009 testimony, Federal Reserve Board Governor Daniel Tarullo also argued for a new
resolution authority as a ―third option between the choices of bankruptcy and bailout.‖ The testimony
argued that allowing losses to be imposed on creditors and shareholders ―is critical to addressing the toobig-to-fail
problem and the resulting moral hazard effects.‖ 11 Former Comptroller of the Currency
Eugene Ludwig also urged the Congress at a September 29, 2009 hearing to create a new resolution
function for large, complex financial companies with financing provided by large financial companies. 12
LIQUIDITY PROGRAMS
Title XI eliminates the ability of either the Federal Reserve or the Federal Deposit Insurance Corporation
to rescue an individual financial firm that is failing, while preserving the ability of both regulators to
provide needed liquidity and confidence in financial markets during times of severe distress. That is to
9 Testimony of Paul Volcker, former Federal Reserve Board Chairman, to the Banking Committee, February 4, 2009.
10 Testimonies of Sheila Bair, Chairman of the Federal Deposit Insurance Corporation, to the Banking Committee, March 19,
May 6, and July 23, 2009.
11 Testimony of Daniel Tarullo, Federal Reserve Board Governor, to the Banking Committee, July 23, 2009.
12 Testimony of Eugene Ludwig, former Comptroller of the Currency, to the Banking Committee, September 29, 2009.
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say, this Title ends the potential for either regulator to come to the rescue of a future AIG, while
reconfiguring the weapons in their financial crisis arsenals to increase accountability without diminishing
their effectiveness.
The Federal Reserve‘s emergency lending authority, under section 13(3) of the Federal Reserve Act, in
the past allowed the Federal Reserve to make loans to individual entities like AIG. While such lending
played an important role in ending the recent financial crisis, it also created potential moral hazard. If the
Federal Reserve were to retain authority to make emergency loans to individual firms, then large,
interconnected firms might increase their risk-taking behavior, since the Federal Reserve would be there
to bail them out in a future financial crisis.
By eliminating the ability to lend to individual institutions, and by requiring all emergency lending to be
done through widely-available liquidity facilities that will be approved by the Treasury, monitored
through periodic reports to Congress and by Comptroller General audits, and backed by collateral
sufficient to protect taxpayers from loss, emergency lending by the Federal Reserve will not be a source
of moral hazard.
During the recent crisis the Federal Deposit Insurance Corporation (FDIC) used the ―systemic risk
exception‖ to its normal bank receivership rules to establish the Temporary Liquidity Guarantee Program
(TLGP) on an ad hoc basis.
By paying a TLGP insurance fee, federally insured depositories and U.S. bank, financial and thrift
holding companies were able to issue unsecured short-term debt with a federal government guarantee. 13
Many firms used this program, and its existence helped them to roll over needed short-term financing
after a period in which the outstanding volume of financial commercial paper contracted sharply and
discount rates spiked upward. 14 At its peak usage level in May 2009 the TLGP insured approximately
$345 billion in outstanding debt. As of December 2009 the debt guarantee program had assessed $10.3
billion in guarantee fees. 15
Under the TLGP, the FDIC also established a program to guarantee non-interest bearing transaction
accounts that exceed the deposit insurance limit. Participating insured depositories pay an annualized
risk-based assessment ranging from 15 to 25 basis points on transaction account amounts that exceed the
current FDIC insurance amount of $250,000.
This Title allows the FDIC to guarantee short-term debt during financial crises, but limits the guarantees
to solvent banks and bank holding companies, restricts the conditions under which such support may be
offered, increases accountability of the guarantee program, and eliminates the possibility that taxpayers
will pay for any losses from the program.
13 The fees charged increase with the maturity of the debt, rising from 12.5 basis points for three-month debt to 100 basis points
for debt with maturities of one year or more, with additional charges added under certain conditions. Eligible entities include:
1) FDIC-insured depository institutions; 2) U.S. bank holding companies; 3) U.S. financial holding companies; and 4) U.S.
savings and loan holding companies that either engage only in activities that are permissible for financial holding companies
under section 4(k) of the Bank Holding Company Act (BHCA) or have an insured depository institution subsidiary that is the
subject of an application under section 4(c)(8) of the BHCA regarding activities closely related to banking. See
http://www.fdic.gov/regulations/resources/tlgp/index.html.
14 For data on outstanding volumes of financial commercial paper and discount rates for AA financial commercial paper see
http://www.federalreserve.gov/releases/cp/.
15 For data on outstanding volumes guaranteed see http://www.fdic.gov/regulations/resources/tlgp/reports.html.
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Under this Title no guarantee can be offered unless the Board of Governors of the Federal Reserve and the
FDIC jointly agree that a liquidity event – essentially a breakdown in the ability of borrowers to access
credit markets in a normal fashion – exists. The FDIC may then set up a facility to guarantee debt,
following policies and procedures determined by regulation. The regulation is to be written in
consultation with the Treasury. The terms and conditions of the guarantees must be approved by the
Secretary of the Treasury.
The Secretary will determine a maximum amount of guarantees, and the President will request Congress
to allow that amount. If the President does not submit the request, the guarantees will not be made.
Congress has 5 days under an expedited procedure to disapprove the request. Fees for the guarantees are
set to cover all expected costs. If there are losses, they are recouped from those firms that received
guarantees. Firms that default on guarantees will be put into receivership, resolution or bankruptcy. Any
FDIC aid to an individual firm under the ―systemic risk exception‖ will henceforth only be possible if the
firm has been placed in receivership, and therefore the FDIC will no longer be able to provide ―open bank
assistance‖ using this exception.
Hence FDIC debt guarantees will be available to help ease liquidity problems during financial crises, but
will not be a source of moral hazard since the FDIC may guarantee only the debt of solvent institutions.
Moreover, taxpayers are protected from any loss by the recoupment requirements.
Title XI also makes important changes to Federal Reserve governance. It establishes the position of Vice
Chairman for Supervision on the Federal Reserve Board of Governors. The Vice Chairman will have the
responsibility to develop policy recommendations on supervision and regulation for the Board, and will
report twice each year to Congress. The Federal Reserve is also given formal responsibility to identify,
measure, monitor, and mitigate risks to U.S. financial stability. In addition, the Federal Reserve is
formally prohibited from delegating its functions for establishing regulatory or supervisory policy to
Federal Reserve banks.
To eliminate potential conflicts of interest at Federal Reserve banks, the Federal Reserve Act is amended
to state that no company, or subsidiary or affiliate of a company, that is supervised by the Board of
Governors can vote for Federal Reserve Bank directors; and the officers, directors and employees of such
companies and their affiliates cannot serve as directors. In addition, to increase the accountability of the
Federal Reserve Bank of New York president, who plays a key role in formulating and executing
monetary policy, this reserve bank officer will be appointed by the President, by and with the advice and
consent of the Senate, rather than by the bank‘s board of directors.
―THE VOLCKER RULE‖
Section 619 of Title VII prohibits or restricts certain types of financial activity -- in banks, bank holding
companies, other companies that control an insured depository institution, their subsidiaries, or nonbank
financial companies supervised by the Board of Governors – that are high-risk or which create significant
conflicts of interest between these institutions and their customers.
Banks, bank holding companies, other companies that control an insured depository institution, their
subsidiaries, or nonbank financial companies supervised by the Board of Governors will be prohibited
from proprietary trading, sponsoring and investing in hedge funds and private equity funds, and from
having certain financial relationships with those hedge funds or private equity funds for which they serve
as investment manager or investment adviser. A nonbank financial institution supervised by the Board of
Governors that engages in proprietary trading, or sponsoring or investing in hedge funds and private
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equity funds will be subject to Board rules imposing capital requirements related to, or quantitative limits
on, these activities. 16
The incentive for firms to engage in these activities is clear: when things go well, high-risk behavior can
produce high returns. In good times these profits allow firms to grow rapidly, and encourage additional
risk-taking. However, when things do not go well, these same activities can produce outsize losses.
When losses from high-risk activities are significant, they can threaten the safety and soundness of
individual firms and contribute to overall financial instability. Moreover, when the losses accrue to
insured depositories or their holding companies, they can cause taxpayer losses. In addition, when banks
engage in these activities for their own accounts, there is an increased likelihood that they will find that
their interests conflict with those of their customers.
The prohibitions in section 619 therefore will reduce potential taxpayer losses at institutions protected by
the federal safety net, and reduce threats to financial stability, by lowering their exposure to risk.
Conflicts of interest will be reduced, for example, by eliminating the possibility that firms will favor
inside funds when placing funds for clients. The prohibitions also will prevent firms protected by the
federal safety net, which have a lower cost of funds, from directing those funds to high-risk uses.
Moreover, they will restrict high-risk activity in those nonbank financial firms that pose threats to
financial stability.
The prohibitions also will reduce the scale, complexity, and interconnectedness of those banks that are
now actively engaged in proprietary trading, or have hedge fund or private equity exposure. The will
reduce the possibility that they will be too big or too complex to resolve in an orderly manner should they
fail.
In testimony submitted to the Committee Neal Wolin, Deputy Secretary of the Treasury, stated that
―proprietary trading, by definition, is not done for the benefit of customers or clients. Rather, it is
conducted solely for the benefit of the bank itself. It is therefore difficult to justify an arrangement in
which the federal safety net redounds to the benefit of such activities.‖ Wolin noted that the role of
proprietary trading and ownership of hedge funds, and their associated high risk, contributed to the crisis
when banks were forced to bail out those operations. Wolin testified, ―Major firms saw their hedge funds
and proprietary trading operations suffer large losses in the financial crisis. Some of these firms ―bailed
out‖ their troubled hedge funds, depleting the firm‘s capital at precisely the moment it was needed
most.‖ 17
Paul Volcker, former Federal Reserve Board Chairman, discussed the benefits to the market from the
prohibition and the impact on systemic risk: ―curbing the proprietary interests of commercial banks is in
the interest of fair and open competition as well as protecting the provision of essential financial
services.‖ Volcker added that the proposal was ―particularly designed to help deal with the problem of
‗too big to fail‘ and the related moral hazard that looms so large as an aftermath of the emergency rescues
of financial institutions[.]‖ 18
THE BUREAU OF CONSUMER FINANCIAL PROTECTION
16 These firms will be supervised by the Board of Governors because their failure could threaten overall financial stability.
17 Testimony by Neal Wolin, Deputy Secretary of the Treasury, to the Senate Banking Committee, 2/2/10.
18 Testimony by Paul Volcker, former Federal Reserve Board Chairman and Chairman of the President‘s Economic Recovery
Advisory Board, to the Senate Banking Committee, 2/2/10.
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The Committee has documented in numerous hearings over the years the failure of the federal banking
and other regulators to address significant consumer protection issues detrimental to both consumers and
the safety and soundness of the banking system. 19 These failures, which are described in more detail
below, led to what has become known as the Great Recession in which millions of Americans have lost
jobs; millions of American families have lost trillions of dollars in net worth; millions of Americans have
lost their homes; and millions of Americans have lost their retirement, college, and other savings.
Structural Problems with Current Consumer Regulation
The current system of consumer protection suffers from a number of serious structural flaws that
undermine its effectiveness, including a lack of focus resulting from conflicting regulatory missions,
fragmentation, and regulatory arbitrage.
To begin with, placing consumer protection regulation and enforcement within safety and soundness
regulators does not lead to better coordination of the two functions, as some would argue. As has been
made amply apparent, when these two functions are put in the same agency, consumer protection fails to
get the attention or focus it needs. Protecting consumers is not the banking agencies‘ priority, nor should
it be. The primary mission of these regulators ―in law and practice,‖ as Assistant Secretary of the
Treasury Michael Barr testified, is to ensure the safe and sound operations of the banks. Because of this,
former Director of the Office of Thrift Supervision (OTS) Ellen Seidman testified, ―[consumer]
compliance has always had a hard time competing with safety and soundness for the attention of
regulators….‖ 20 In fact, as Assistant Secretary Barr pointed out, bank regulators conduct consumer
protection supervision with an eye toward bank safety and soundness by, for example, trying to protect
the banks from reputation and litigation risks rather than examining how products and services affect
consumers. ―Managing risks to the bank does not and cannot protect consumers effectively. This
approach judges a bank‘s conduct toward consumers by its effect on the bank, not … on consumers.‖ 21
This may lead, as some witnesses before the Committee testified, to an emphasis by the regulators on the
short term profitability of the banks at the expense of consumer protection. 22
The current system is also too fragmented to be effective. There are seven different federal regulators
involved in consumer rule writing or enforcement. Gene Dodaro, Acting Comptroller General, testified
that ―the fragmented U.S. regulatory structure contributed to failures by the existing regulators to
adequately protect consumers and ensure financial stability.‖ 23 This undermines accountability.
This fragmentation led to regulatory arbitrage between federal regulators and the states, while the lack of
any effective supervision on nondepositories led to a ―race to the bottom‖ in which the institutions with
the least effective consumer regulation and enforcement attracted more business, putting pressure on
regulated institutions to lower standards to compete effectively, ―and on their regulators to let them.‖ 24
19 ―The need could not be clearer. Today‘s consumer protection regime just experienced massive failure. It could not stem a
plague of abusive and unaffordable mortgages and exploitative credit cards despite clear warning signs. It cost millions of
responsible consumer their homes, their savings, and their dignity. And it contributed to the near-collapse of our financial
system. We did not have just a financial crisis; we had a consumer crisis.‖ Testimony of Michael Barr, Assistant Secretary of
the Treasury for Financial Institutions, to the Senate Committee on Banking, Housing, and Urban Affairs,, July 14, 2009.
20 Testimony of Ellen Seidman, former Director of the Office of Thrift Supervision, to the Banking Committee, March 2, 2009.
21 Testimony of Michael Barr, July 14, 2009.
22 Testimony of Patricia McCoy, George J. and Helen M. England Professor of Law, University of Connecticut to the Banking
Committee, hearing on March 3, 2009 and testimony of Travis Plunkett, Legislative Director of the Consumer Federation of
America to the Banking Committee, July 14, 2009.
23 Testimony of Gene Dodaro, Acting Comptroller General of the United States, February 4, 2009.
24 Testimony of Michael Barr, July 14, 2009.
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A More Effective Approach
This legislation creates the Bureau of Consumer Financial Protection (CFPB), a new, streamlined
independent consumer entity housed within the Federal Reserve System. The CFPB will be focused on
ensuring that consumers get clear and effective disclosures in plain English and in a timely fashion so that
they will be empowered to shop for and choose the best consumer financial products and services for
them.
The new CFPB will establish a basic, minimum federal level playing field for all banks and, for the first
time, nondepository financial companies that sell consumer financial products and services to American
families. It will do so without creating an undue burden on banks, credits unions, or nondepository
providers of these products and services.
The CFPB will help protect consumers from unfair, deceptive, and abusive acts that so often trap them in
unaffordable financial products. The CFPB will stop regulatory arbitrage – it will write rules and enforce
those rules consistently, without regard to whether a mortgage, credit card, auto loan, or any other
consumer financial product or service is sold by a bank, a credit union, a mortgage broker, an auto dealer,
or any other nondepository financial company so a consumer can shop and compare products based on
quality, price, and convenience without having to worry about getting trapped by the fine print into an
abusive deal.
The legislation ends the fragmentation of the current system by combining the authority of the seven
federal agencies involved in consumer financial protection in the CFPB, thereby ensuring accountability.
The CFPB will have enough flexibility to address future problems as they arise. Creating an agency that
only had the authority to address the problems of the past, such as mortgages, would be too short-sighted.
Experience has shown that consumer protections must adapt to new practices and new industries.
Mortgage Crisis
The fundamental story of the current turmoil is relatively easy to tell. It began early in this decade
with a weakening of underwriting standards for subprime mortgages in the U.S. Subprime, alt-A
and other mortgage products [which] were sold to people who could not afford them and in some
cases in violation of legal standards. 25
– Eugene Ludwig
This financial crisis was precipitated by the proliferation of poorly underwritten mortgages with abusive
terms, followed by a broad fall in housing prices as those mortgages went into default and led to
increasing foreclosures. These subprime and nontraditional mortgages were characterized by relatively
low initial interest rates that allowed borrowers to obtain loans for which they might not otherwise
qualify. 26 However, after 2 or 3 years, the rates would jump up significantly – as much as 30 to 40
25 Testimony of Eugene Ludwig to the Banking Committee, October 16, 2008.
26 It is important to note that the vast majority of subprime mortgages were used to refinance existing mortgages rather than to
purchase a home. According to data collected by the Center for Responsible Lending (―Subprime Lending: A Net Drain on
Homeownership,‖ CRL Issue Paper #14, March 27, 2007), 62% of subprime loans made from 1998 through 2006 were
refinances; only 9% were for first time home purchase loans (11% in 2006 was the highest figure). In other words, even before
the foreclosure crisis hit, subprime loans did not make a substantial contribution to new homeownership. Rather, they put
existing homeowners at greatly increased risk of losing their homes. Indeed, according to CRL, as of early 2007, there was a
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percent or more, according to the testimony of Michael Calhoun, President of the Center for Responsible
Lending (CRL). 27 The great majority of the payment-option adjustable rate mortgages (option ARMs)
resulted in significant negative amortization, so that many borrowers owed more on their mortgages after
several years than when the mortgages were initially sold.
According to testimony heard in the Committee in late 2006, 28 and again in early 2007, 29 many of these
loans were made with little or no regard for a borrower‘s understanding of the terms of, or their ability to
repay, the loans. At a September 20, 2006 Subcommittee hearing, Subcommittee Chairman Bunning said
―it is not clear that borrowers understand [the] risks‖ associated with these mortgages, a conclusion borne
out both by a study by the Federal Reserve Board and the Consumer Federation of America (CFA). As
Allen Fishbein, then Director of Housing Policy at the CFA, testified:
Consumers today face a dizzying array of mortgage products that are marketed and promoted
under a range of products names. While the number of products has exploded, there appears to be
little understanding by many borrowers about key features in today‘s mortgages and how to
compare or even understand the differences between these products.
A 2004 Consumer Federation of America survey found that most consumers cannot calculate the
payment change for an adjustable rate mortgage. … all respondents underestimated the annual
increase in the cost of monthly mortgage payments if the interest rate [increased] from 6 percent to
8 percent…. Younger, poorer, and less formally educated respondents underestimated by as much
as 50 percent. 30
Fishbein also cited a Federal Reserve study of ARM borrowers that found that 35 percent of them did not
know the maximum amount their interest rate could increase at one time; 44 percent did not know the
maximum rate they could be charged; and 17 percent did not know the frequency with which the rate
could change. 31
Finally, Fishbein cited a focus group of exotic mortgage borrowers organized by Public Opinion
Strategies. It found that these consumers were ―surprised by the magnitude of the payment shock‖ once
rate sheets with the various mortgage option terms were shown to them. Lower-income borrowers, in
particular, called the payment increases ―shocking.‖ Fishbein explained that these lower-income
borrowers ―were less informed about the payment increases and debt risks of non-traditional mortgages,
with some noting they ‗wish they had known more.‘‖ 32
net loss in homeownership of over 900,000 households, a figure that has certainly increased greatly since the CRL paper was
written. FDIC Vice Chair Marty Gruenberg made this point in a speech in New York on January 8, 2008, when he said:
―[i]t has been said that a lot of these homes were bought on a speculative basis and people who did that don't deserve
help. That is true of some. But it is important to understand that the majority of subprime mortgages were refinancings of
existing homes. In other words, these were homes in which the homeowner was living, with mortgages that the
homeowner was paying and could afford. In many cases the homeowner was encouraged or induced to refinance into one
of these subprime mortgages with exploding interest rates that the homeowner couldn't afford.
27 Testimony of Michael Calhoun, President of the Center for Responsible Lending, to the Subcommittee on Housing,
Transportation, and Community Development of the Banking Committee, June 26, 2007.
28 The Housing and Transportation and Economic Policy Subcommittees of the Banking Committee held two hearings on the
issues arising from the increase in nontraditional mortgage lending: September 13, 2006 and September 20, 2006.
29 See Banking Committee Hearings on February 7 and March 22, 2007.
30 Testimony of Allen Fishbein, Director of Housing Policy at the Consumer Federation of America, to the joint
Subcommittees, September 20, 2006. Mr. Fishbein is currently Assistant Director
for Policy Analysis, Consumer Education and Research at the Federal Reserve Board.
31 Testimony to the joint Subcommittee hearing, September 20, 2006 citing January, 2006 Federal Reserve Study, written by
Brian Buck and Karen Pence, ―Do Homeowners Know Their House Values and Mortgage Terms‖
32 Testimony of Allen Fishbein, September 20, 2006.
10

In that same hearing, Senator Sarbanes said that:
Too often … loans have been made without the careful consideration as to the long-term
sustainability of the mortgage. Loans are being made without the lender documenting that the
borrower will be able to afford the loan after the expected payment shock hits without depending
on rising incomes or increased appreciation.
Several months later, as the problem worsened, Chairman Dodd noted in a March 22, 2007 hearing that:
… a sort of frenzy gripped the market over the past several years as many [mortgage] brokers and
lenders started selling these complicated mortgages to low-income borrowers, many with less than
perfect credit, who they knew or should have known … would not be able to afford to repay these
loans when the higher payments kicked in. (emphasis added).
Underscoring this point, the General Counsel of Countrywide Financial Corporation, one of the biggest
subprime lenders in 2007, acknowledged in response to a question from Chairman Dodd that ―about 60
percent of the people who do qualify for the hybrid ARMs would not be able to qualify at the fully
indexed rate‖ 33 (that is, at the rate a borrower would have to pay after the loan reset, even assuming
interest rates did not rise). Another witness, Jennie Haliburton, an elderly resident of Philadelphia,
Pennsylvania who lived on a fixed income of social security benefits, had been sold such a mortgage and
was facing a jump in her mortgage payment to 70 percent of her income. The Department of Housing and
Urban Development considers payments by consumers of more than 50% of income for shelter to put
those consumers at ―high risk‖ of losing their homes.
This testimony clearly demonstrates that the lenders were aware that borrowers would need to refinance
their loans or sell their homes when the mortgages reset, thereby generating additional fees for the brokers
and lenders. This was, in the words of Martin Eakes, Chief Operating Officer of the Self-Help Credit
Union, ―a devil‘s choice.‖ 34
The Committee heard some discussion as to what institutions were most responsible for originating these
loans. There is little doubt that nondepository financial companies were among the largest sellers of
subprime and exotic mortgages. However, insured depositories and their subsidiaries were heavily
involved in these markets. According to data compiled by Federal Reserve Board Economists, 36
percent of all higher-priced loans in 2005 and 31 percent in 2006 were made by insured depositories and
their subsidiaries. Those numbers jump to 48 percent and 44 percent when bank affiliates are included. 35
This illustrates that being under the supervision of a federal prudential regulator did not guarantee that
mortgage underwriting practices were any stronger, or consumer protections any more robust. As noted,
the regulators allowed this deterioration in underwriting standards to take place in part to prevent the
institutions they regulate from getting priced out of the market.
Unfortunately, many of these mortgages were packaged by big Wall Street banks into mortgage-backed
securities (MBS) and sold in pieces all over the world. Because of the unaffordable and abusive terms of
the loans, these mortgages became delinquent at the highest rates since mortgage performance data started
being collected over 30 years ago leading, in turn, to increasing foreclosures, decreasing housing demand,
33 See Banking Committee hearings on March 22, 2008.
34 Testimony of Martin Eakes, Chief Operating Officer of the Self-Help Credit Union, to the Committee, February 7, 2007.
35 Neil Bhutta and Glenn Canner, ―Did CRA Cause the Mortgage Market Meltdown,‖ Federal Reserve Bank of Minneapolis,
March 9, 2009.
11

and a widespread decline in housing prices. Once housing prices fell, families who might otherwise have
been able to refinance their mortgages were unable to do so because they found themselves ―underwater,‖
owing more on their mortgages than the home is worth at that time.
As a result, the MBS into which these now non-performing mortgages were bundled lost significant
value, helping lead to the systemic collapse from which we are currently suffering.
Effect on Minorities
The mortgage lending system is deeply flawed…. The crisis is having a disproportionate impact
on African American families, Latino families, low income families. And that disproportionate
impact is not explained away by factors that would ordinarily justify such a problem. 36
-- Wade Henderson
Regrettably, the Committee heard a lot of testimony outlining how mortgage originators targeted
minorities for subprime mortgages even when these borrowers might have qualified for lower cost prime
mortgages. In fact, according to a study conducted by the Wall Street Journal, as many as 61 percent of
those receiving subprime loans ―went to people with credit scores high enough to often qualify for
conventional loans with far better terms.‖ 37 Under the Home Mortgage Disclosure Act (HMDA), the
Federal Reserve collects data on "high cost" mortgage lending, defined as mortgage loans which are 3
points above the Treasury rate. According to HMDA data released in 2007 by the Federal Reserve, 54
percent of African-Americans and 47 percent of Hispanics received high cost mortgages in 2006. Only 18
percent of non-Hispanic whites received high cost mortgages. The Federal Reserve study found that
borrower related factors, such as income, accounted for only one sixth of this disparity. CRL did a study
of the 2004 HMDA data which controls for other significant risk factors used to determine loan pricing,
such as income and credit scores. The CRL study found that African-Americans were more likely to
receive higher-rate home-purchase and refinance loans than similarly-situated white borrowers, and that
Latino borrowers were more likely to receive higher-rate home purchase loans than similarly-situated
non-Latino white borrowers. 38
Failure of the Safety and Soundness Regulators
It has become clear that a major cause of the most calamitous worldwide recession since the
Great Depression was the simple failure of federal regulators to stop abusive lending, particularly
unsustainable home mortgage lending. 39 – Travis Plunkett
Underlying this whole chain of events leading to the financial crisis was the spectacular failure of the
prudential regulators to protect average American homeowners from risky, unaffordable, ―exploding‖
adjustable rate mortgages, interest only mortgages, and negative amortization mortgages. These
regulators ―routinely sacrificed consumer protection for short-term profitability of banks,‖ 40
undercapitalized mortgage firms and mortgage brokers, and Wall Street investment firms, despite the fact
that so many people were raising the alarm about the problems these loans would cause.
36 Testimony of Wade Henderson, President and CEO of the Leadership Conference on Civil Rights, to the Subcommittee on
Housing, Transportation, and Community Development hearing, June 26, 2007.
37 ―Subprime Debacle Traps Even Very Credit-Worthy, Wall Street Journal, December 3, 2007.
38 CRL, ―Unfair Lending: The Effect of Race and Ethnicity on the Price of Subprime Mortgages,‖ May 31, 2006.
39 Testimony of Travis Plunkett, Legislative Director of the Consumer Federation of America to the Banking Committee, July
14, 2009.
40 Testimony of Patricia McCoy to the Banking Committee, March 3, 2009.
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In 1994, Congress enacted the ―Home Ownership and Equity Protection Act‖ (HOEPA) which states that:
the Board, by regulation or order, shall prohibit acts or practices in connection with –
(a) Mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the
provisions of this section; and
(b) Refinancing of mortgage loans that the Board finds to be associated with abusive lending
practices or that are otherwise not in the interests of borrower.
As early as late 2003 and early 2004, Federal Reserve staff began to ―‗observe deterioration of credit
standards‘‖ in the origination of non-traditional mortgages. 41 Yet, the Federal Reserve Board failed to
meet its responsibilities under HOEPA, despite persistent calls for action.
As Professor McCoy noted in her testimony to the Committee, ―federal banking regulators added fuel to
the crisis by allowing reckless loans to flourish.‖ Professor McCoy points out that the regulators had
―ample authority‖ to prohibit banks from extending credit without proof of a borrower‘s ability to pay.
Yet, she notes, ―they refused to exercise their substantial powers of rule-making, formal enforcement, and
sanctions to crack down on the proliferation of poorly underwritten loans until it was too late.‖ 42
Finally, in July of 2008, long after the marketplace had shut down the availability of subprime and exotic
mortgage credit, and much of prime mortgage credit not directly supported by federal intervention, the
Federal Reserve Board issued rules that would likely prevent a repeat of the same kinds of problems that
led to the current crisis.
Where federal regulators refused to act, the states stepped into the breach. In 1999, North Carolina
became the first State to enact a comprehensive anti-predatory law. Other States followed suit as the
devastating results of predatory mortgage lending became apparent through increased foreclosures and
disinvestment.
Unfortunately, rather than supporting these anti-predatory lending laws, federal regulators preempted
them. In 1996, the OTS preempted all State lending laws. The OCC promulgated a rule in 2004 that,
likewise, exempted all national banks from State lending laws, including the anti-predatory lending laws.
At a hearing on the OCC‘s preemption rule, Comptroller Hawke acknowledged, in response to
questioning from Senator Sarbanes, that one reason Hawke issued the preemption rule was to attract
additional charters, which helps to bolster the budget of the OCC. 43
Two recent studies by the Center for Community Capital at the University of North Carolina document
the damage created by this preemption regulation. The two studies found that:
(1) States with strong anti-predatory lending laws exhibited significantly lower foreclosure risk than
other States. A typical State law reduced neighborhood default rates by as much as 18 percent;
(2) Loans made by lenders covered by tougher State laws had fewer risky features and better
underwriting practices to ensure that borrowers could repay;
(3) Mortgage defaults increased more significantly among exempt OCC lenders in States with strong
anti-predatory lending laws than among lenders that were still subject to tougher State laws. For
example, default rates of fixed-rate refinance mortgages made by national banks not subject to
41 Banking Committee document, ―Mortgage Market Turmoil: A Chronology of Regulatory Neglect‖ prepared by the staff of
the Banking Committee, March 22, 2007.
42 Testimony to the Banking Committee, March 3, 2009.
43 Banking Committee hearing, April 7, 2004.
13

State laws were 41 percent more likely to default and purchase-money mortgages made by these
banks were 7 percent more likely to default than loans those banks made prior to preemption; and
(4) Risky lending by national banks more than doubled in some loan categories (fixed-rate refinances)
after preemption than before, 11 percent to 29 percent. 44
In remarkably prescient testimony, Martin Eakes warned in 2004 that the OCC‘s action on preemption
―plants the seeds for long-term trouble in the national banking system.‖ He went on to say:
Abusive practices may well be profitable in the short term, but are ticking time bombs waiting to
explode the safety and soundness of national banks in the years ahead. The OCC has not only
done a tremendous disservice to hundreds of thousands of borrowers, but has also sown the seeds
for future stress on the banking system. 45
In sum, the Federal Reserve and other federal regulators failed to use their authority to deal with mortgage
and other consumer abuses in a timely way, and the OCC and the OTS actively created an environment
where abusive mortgage lending could flourish without State controls.
Other Consumer Financial Products and Services
Though the problems in the mortgage market have received most of the public‘s attention, consumers
have long faced problems with many other consumer financial products and services without adequate
federal rules and enforcement. Abusive lending, high and hidden fees, unfair and deceptive practices,
confusing disclosures, and other anti-consumer practices have been a widespread feature in commonly
available consumer financial products such as credit cards. These problems have been documented in
numerous hearings before the Banking Committee and other Congressional Committees over the years.
Credit Cards. For example, credit card companies have long been known to provide extremely
confusing disclosures, making it nearly impossible for consumers to understand the terms for which they
are signing up. Card companies have engaged in extremely aggressive marketing, such that creditor
marketing and credit extension increased at about two times the rate as credit card debt taken on by
consumers from 1999 to 2007. 46
Moreover, typical credit card companies and banks engaged in a number of abusive pricing practices,
including double-cycle billing, universal default, retroactive changes in interest rates, over the limit fees
even where the consumer was not notified that a charge put him or her over the allotted credit limit, and
arbitrary rate increases.
Despite the growing problems, federal banking regulators did very little. As Adam Levitin, Associate
Professor of Law at Georgetown University Law Center explained to the Committee at a February, 2009
hearing,
44 ―The APL Effect: The Impacts of State Anti-Predatory Lending Laws on Foreclosures,‖ by Lei Ding, et al; University of
North Carolina, March 23, 2010 and ―The Preemption Effect: The Impact of Federal Preemption of State Anti-Predatory
Lending Laws on the Foreclosure Crisis,‖ by Lei Ding et al, March 23, 2010.
45 Testimony of Martin Eakes to the Banking Committee, April 7, 2004.
46 Testimony of Travis Plunkett to the Banking Committee, February 12, 2009.
14

The current regulatory regime for credit cards is inadequate and incapable of keeping pace with
credit card industry innovation. The agencies with jurisdiction over credit cards lack regulatory
motivation and have conflicting missions …. 47
To illustrate this point, research shows that, from 1997 to 2007, the OCC took just 9 formal enforcement
actions regarding violations of the Truth in Lending Act with regards to credit cards or other consumer
lending. 48 In fact, the Comptroller of the Currency wrote a letter objecting to certain parts of the Federal
Reserve Board‘s proposed regulation on credit cards on safety and soundness grounds. 49
Even after President Obama signed the Credit Card Accountability, Responsibility, and Disclosures Act
(CARD Act) into law, credit card companies sought ways to structure products to get around the new
rules, highlighting the difficulty of combating new problems with additional laws, while underscoring the
importance of creating a dedicated consumer entity that can respond quickly and effectively to these new
threats to consumers.
Overdrafts. Similar problems have been revealed by the Committee‘s examination of overdraft fees. 50
Overdraft coverage for a fee is a form of short term credit that financial institutions extend to consumers
to cover overdrafts on check, ACH, debit and AMT transactions. Historically, financial institutions
covered overdrafts for a fee on an ad hoc basis. With the growth in specially designed software programs
and in consumer use of debit cards, overdraft coverage for a fee has become more prevalent.
A consumer normally qualifies for overdraft coverage if his or her account has been open for a specified
period (usually six months), and there are regular deposits into the account. If those criteria are met, most
financial institutions automatically enroll consumers in overdraft coverage without the consumer‘s
knowledge or choice. ―Consumers do not apply for … this credit, do not receive information on the cost
to borrow [these funds], are not warned when a transaction is about to initiate an overdraft, and are not
given the choice of whether to borrow the funds at an exorbitant price or simply cancel the transaction.‖ 51
Once overdraft coverage for a fee has been added to an account, some financial institutions do not allow
consumers the option of eliminating the coverage, although other more consumer friendly alternatives like
overdraft lines of credit or linking checking and savings accounts are available.
Many consumers who are enrolled in these programs without their knowledge find themselves subject to
high fees of up to $35 per transaction even if the overdraft is only a few cents. In some cases, consumers
have been charged multiple fees in one day without being notified until days later. Most institutions also
charge an additional fee for each day the account remains overdrawn. Some financial institutions will
even re-arrange the order in which they process purchases, charging for a later, larger purchase first so
that they can charge repeated overdraft coverage fees for earlier, smaller purchases.
47 Testimony of Levitin, Associate Professor of Law at Georgetown University Law Center to the Banking Committee,
February 12, 2009.
48 Testimony of Michael Calhoun to the U.S. House of Representatives Committee on Financial Services, September 30, 2009.
49 Letter from Comptroller of the Currency John Dugan to the Board of Governors of the Federal Reserve System, August 18,
2008.
50 Banking Committee hearing, November 17, 2009.
51 Testimony of Jean Ann Fox, Director of Financial Services at Consumer Federation of America to the Banking Committee,
November 17, 2009.
15

The result has been that American consumers paid $24 billion in overdraft fees in 2008, 52 and $38.5
billion in overdraft fees in 2009. 53 CRL also found that nearly $1 billion of those fees would come from
young adults, and $4.5 billion would come from senior citizens.
In addition, the Federal Deposit Insurance Corporation (FDIC) found that a small percentage (12%) of
consumers overdraw their account five times per year or more. For these consumers, overdraft coverage
is a form of high cost short term credit similar to a payday loan. For example, a consumer repaying a $20
point of sale debit overdraft in two weeks is effectively paying an APR of 3,520%. 54
For many years, the Federal Reserve and other regulators have been aware of the abusive nature of
overdraft coverage programs. In fact, an Interagency Guidance in 2005 called overdraft coverage
programs ―abusive and misleading.‖ Nonetheless, the Federal Reserve has only issued modest rule after
modest rule to address these programs. Despite years of concerns raised, it was not until November of
last year that the Federal Reserve adopted another modest rule on overdraft coverage that would prohibit
financial institutions from charging any consumer a fee for overdrafts on ATM and debit card
transactions, unless the consumer opts in to the overdraft service for those types of transactions. Much
more needs to be done in this area to protect consumers and rein in abusive practices.
Debt Collection. The Committee has similar concerns regarding the record of abusive, deceptive and
unfair practices by debt collectors. The Fair Debt Collection Practices Act (FDCPA) was passed by
Congress to regulate debt collection activities and behavior, but despite the existence of the act, debt
collection abuses proliferate. In the last five years, consumers have filed nearly half a million complaints
with the Federal Trade Commission about debt collection practices. These complaints include numerous
reports of behavior in violation of the act, including: debt collectors threatening violence, using profane or
harassing language, bombarding consumers with continuous calls, telling neighbors or family about what
is owed, calling late at night, and falsely threatening arrest, seizure of property or deportation. The FTC
receives more complaints from consumers about debt collectors than any other industry. Despite these
complaints, in the last five years, the FTC has only filed nine debt collection cases.
In addition to concerns about debt collection tactics, the Committee is concerned that consumers have little
ability to dispute the validity of a debt that is being collected in error. The FDCPA provides that, if a
consumer disputes a debt, the collector is required to obtain verification of the debt and provide it to the
consumer before renewing its collection efforts. The FDCPA does not, however, specify what constitutes
―verification of the debt,‖ with the result that many collectors currently do little more than confirm that
their information accurately reflects what they received from the creditor. The limited information debt
collectors obtain in verifying debts is unlikely to dissuade them from continuing their attempts to collect
from the wrong consumer or the wrong amount, so that an aggrieved consumer has virtually no protection
against erroneous efforts to collect.
Debt collectors who are unsuccessful in collecting on a debt may use attorneys to file frequent lawsuits
that they are not prepared to litigate, and which may not be factually valid, with the expectation that a
large number of consumers will default or will not be prepared to defend themselves. Abuses in these
suits have been documented in numerous press reports 55 and by the FTC as well as by consumer
52 Testimony of Michael Calhoun, November 17, 2009.
53 Julianne Pepitone, ―Bank overdraft fees to total $38.5 billion,‖ CNNMoney.com,
http://money.cnn.com/2009/08/10/news/companies/bank_overdraft_fees_Moebs/index.htm.
August 10, 2009.
54 FDIC Study of Bank Overdraft Programs, November, 2008.
55 ―Debtors‘ Hell‖ 4-Part Series, Boston Globe, July 30-August 2, 2006.
16

advocates. The FTC found that ―the vast majority of debt collection suits filed in recent years has posed
considerable challenges to the smooth and efficient operations of the courts.‖ 56 This deluge of debt
collection suits means the following abusive debt collection practices can occur: filing collection suits
against the wrong people; filing suits past the statute of limitations; collection attorneys not having any
proof of the debt sued upon and falsely swearing they do; suing for more than is legally owed; and
laundering a time barred debt with a new judgment. Most of these cases result in default judgment, often
with little or no evidence to support the debt, because the debtor is intimidated and does not show up.
Once a creditor obtains a judgment, the effects can be sustained and devastating, regardless of whether the
consumer actually owed on the underlying debt. Despite the FDCPA, the FTC in February of 2009 issued
a report stating that debt collection litigation practices appear to raise substantial consumer protection
concerns.
Payday Lending. Payday loans are small, short-term cash advances made at extremely high interest
rates. Typically, a borrower writes a personal check for $100-$500, plus a fee, payable to the lender. The
loan is secured by the borrower‘s personal check or some form of electronic access to the borrower‘s bank
account, and the full amount of the loan plus interest must be repaid on the borrower‘s next payday to
keep the personal check required to secure the loan from bouncing.
The average loan amount for a payday loan is $325, and finance charges are generally calculated as a fee
per hundred dollars borrowed. This fee is usually $15 to $30 per $100 borrowed. The average interest
rate for a payday loan is between 391% and 782% APR for a two-week loan. Payday loans cost
consumers over $4.2 billion in fees each year.
Cash-strapped consumers who must borrow money this way are usually in significant debt or living on
the financial edge. A loan can become even more expensive for the borrower who does not have the
funds to repay the loan at the end of two weeks and obtains a rollover or loan extension. Many borrowers
must devote 25 to 50 percent of their take-home income to repay the payday loan, leaving them with
inadequate resources to meet their other obligations. This often leads to a succession of new payday loans
for that family. 57 An additional fee is attached each time the loan is extended through a rollover
transaction. The high rates make it difficult for many borrowers to repay the loan, thus putting many
consumers on a perpetual debt treadmill where they extend the loan several times over. For example, if a
payday loan of $100 for 14 days with a fee of $15 were rolled over three times, it would cost the borrower
$60 to borrow $100 for 56 days. Loan fees can quickly mount and could eventually become greater than
the amount actually borrowed. The typical payday borrower renews his or her loan multiple times before
being able to pay the loan in full, and ends up paying $793 for a $325 loan. 58
If the borrower defaults on the loan, serious financial consequences can occur. Loans secured by personal
checks or electronic access to the borrower‘s bank account can endanger the banking status of borrowers.
The lender can deposit the customer‘s personal check, which would result in additional fees from the bank
for insufficient funds if it did not clear the borrower‘s checking account and could result in the consumer
being identified as a writer of bad checks. Requiring consumers to turn over a post-dated check can
subject consumers to coercion or harassment by illegal threats or coercive collection practices. For
example, consumers have reported being threatened with jail for passing a bad check, even when the law
specifically says they cannot be prosecuted if the check bounces.
56 ―Collecting Consumer Debts: The Challenges Of Change,‖ Federal Trade Commission, February 2009, p.55.
57 Leslie Parish and Uriah King, Phantom Demand, Center for Responsible Lending, July 9, 2009.
58 King, Uriah, Parrish, Leslie, and Tanki, Ozlem. ―Financial Quicksand.‖ Center for Responsible Lending.
November 30, 2006.
17

Auto Dealer Lending. Auto loans constitute the largest category of consumer credit outside of
mortgages. Today, there is more outstanding auto debt ($850 billion) than there is credit card debt in this
country. Auto dealers finance 79% of the purchases of cars in the United States. Auto dealers actively
market and price borrowers‘ loans. They also routinely mark up loan rates that are higher than the
borrower would need to pay to qualify for the credit, and, like mortgage brokers or bankers, the auto
dealers collect a significant portion of the excess finance charges that result from that markup, similar to a
yield spread premium. 59 In addition, auto dealers often charge origination fees and may use the financing
transaction as a way to sell other unrelated products (warranties and credit insurance, for example) to
unsuspecting buyers. Unlike a mortgage broker, however, auto dealers are the legal creditors.
As with mortgages, borrowers are simply unaware of the incentives pushing the auto dealers to charge
buyers higher interest rates. Auto dealers have a history of abusive and discriminatory lending. In a letter
to Chairman Dodd and Ranking Member Shelby, the Leadership Conference on Civil Rights (LCCR)
explains that
detailed research by academics earlier this decade on millions of auto loans revealed that auto
dealers were far more likely to mark up the loan rates of minorities. Class actions revealed
discrimination at GM, Toyota, Ford dealerships, among others. As a result, courts ordered most
major car finance companies to cap rates … though the orders expire soon. 60
In meetings with Banking Committee staff, the National Automobile Dealers Association (NADA) argued
that the current rate cap imposed by the courts mitigate the need for CFPB rulemaking to protect
consumers. To the contrary, this history of discriminatin indicates the need for careful oversight into the
future, particularly as the court orders expire over the next several years.
As with mortgage bankers and brokers, auto dealers use an ―originate to sell‖ model which results in the
car dealers receiving upfront compensation for originating the loans, without regard to the ongoing
performance of the loan. And, unlike mortgages, very few people ever refinance car loans, even if they
find out that they have been charged above-market rates. As a result, auto dealers have a significant
incentive to steer borrowers to the highest rate loans they can, without borrowers ever being aware of the
backdoor transaction.
In addition to minorities and lower-income borrowers, military personnel are among those whom are
frequently exploited by auto dealers. For that reason, Clifford Stanley, the Under Secretary of Defense
for Personnel and Readiness ―welcome[s] and encourage[s] CFP[B] protections‖ for service members and
their families ―with regard to unscrupulous automobile sales and financing practices….‖ Under Secretary
Stanley writes that the oversight of auto financing by the CFPB for service members will help reduce
concerns they have about their well-being. He goes on to say:
The Department of Defense fully believes that personal financial readiness of our troops and
families equates to mission readiness. 61
59 Raj Date and Brian Reed, Auto Race to the Bottom; Free Markets and Consumer Protection in Auto Finance, November 16,
2009.
60 Letter to Chairman Dodd and Ranking Member Shelby from the Leadership Conference on Civil Rights, December 3, 2009.
The letter explains that ―minority car buyers pay significantly higher dealer markups [for auto loans] than non-minority car
buyers with the same credit scores.‖ (Emphasis in original).
61 Letter from Under Secretary of Defense to Clifford Stanley to Assistant Secretary of the Treasury, Michael Barr. February
26, 2010.
18

Similarly, The Military Coalition, a consortium of nationally prominent military and veterans
organizations representing more than 5.5 million current and former service members and their families
supports CFPB regulation of auto dealers with regard to auto lending. In a letter to the Chairman and
Ranking Member, the Coalition notes that auto financing is ―the most significant financial obligation for
the majority of service members.‖ It goes on to say that ―including auto dealers financing … in the
financial reform bill will provide greater protections for our service members and their families‖ by
protecting them from such reported abuses as bait and switch financing, falsification of loan documents,
failure to pay-off liens, and packing loans with other products. 62
Access to automobile financing on fair terms is very important to American families, particularly to lowincome
families. Studies indicate that access to a reliable automobile is an important factor for finding
and keeping jobs, especially as more and more jobs are being created outside of city centers. Writing in
New England Community Developments, Signe-Mary McKernan and Caroline Ratcliffe of the Urban
Institute note that
providing low-income families with less burdensome auto-financing alternatives and helping them
avoid the subprime loan market can lead to better credit scores and increase the likelihood that
low-income families become integrated into the formal financial sector. 63
However, despite the abuses in this sector, and the urgent need for better consumer protections, the
federal government has not done enough to address these issues. ―Given the widespread nature of the
problem [with auto lending] revealed in the academic studies and private litigation, the current structure
has failed to effectively police auto finance.‖ 64 That is one of the reasons, according to the LCCR, the
CFPB is needed.
STRENGTHENING AND CONSOLIDATING PRUDENTIAL SUPERVISION
Title III seeks to increase the accountability of the banking regulators by establishing clearer lines of
responsibility and to reduce the regulatory arbitrage in the financial regulatory system whereby financial
companies ―shop‖ for the most lenient regulators and regulatory framework. ―One clear lesson learned
from the recent crisis was that competition among different government agencies responsible for
regulating similar financial firms led to reduced regulation in important parts of the financial system. The
presence of multiple federal supervisors of firms that could easily change their charter led to weaker
regulation and became a serious structural problem within our supervisory system.‖ 65
Need to Consolidate Fragmented Banking Supervision
Title III rationalizes the fragmented structure of banking supervision in the U.S. by abolishing one of the
multiple banking regulators, consolidating supervision of state banks in a single federal regulator, and
consolidating supervision of smaller bank holding companies (those with assets of less than $50 billion)
so that the regulator for the bank or thrift will also regulate the holding company. For the largest bank
and thrift holding companies, the Federal Reserve Board will be the consolidated holding company
62 Letter to Chairman Dodd and Ranking Member Shelby from The Military Coalition, April 15, 2010. The Coalition includes
31 members, including the Veterans of Foreign Wars, the Military Order of the Purple Heart, the National Guard Association
of the U.S., the Non Commissioned Officers Association of the U.S.A., the Iraq and Afghanistan Veterans of America, and
others.
63 Signe-Mary McKernan and Caroline Ratcliffe, ―Asset Building for Today‘s Stability and Tomorrow‘s Security,‖ New
England Community Developments, Federal Reserve Bank of Boston, 2009, Issue 2.
64 Letter to Chairman Dodd and Senator Shelby by the LCCR, December 3, 2009.
65 ― Financial Regulatory Reform: A New Foundation‖, Administration‘s White Paper, June 2009.
19

supervisor. The Board will thus focus its supervisory responsibilities on the larger, more interconnected
bank and thrift holding companies (which will include, but not be limited to, those companies whose
failures potentially pose risk to U.S. financial stability) where its experience in capital and global markets
can best be applied. By consolidating its supervision over these holding companies, the Board can pursue
risks wherever they may emerge within the company (including its subsidiaries) and will ultimately be
responsible for the sound operation of the entire organization.
The Committee heard repeated testimony that the U.S. financial regulatory system is more a product of
history and responses to various crises, than deliberate design. According to the GAO, it has not kept
pace with major developments in the financial marketplace. In testimony before the Committee on
September 29, 2009, the GAO testified in favor of decreasing fragmentation in the system (beyond the
Administration‘s proposal to abolish the OTS), reducing the potential for differing regulatory treatment,
and improving regulatory independence. 66
At the same hearing, former Comptroller of the Currency, Eugene Ludwig, testified that, ―We must
dramatically streamline the current alphabet soup of regulators‖, citing the needless burden on financial
institutions of the duplicative and inefficient system, the fertile ground that multiple regulatory agencies
create for regulatory arbitrage, and the serious gaps between regulatory responsibilities. 67
The Committee heard testimony from Richard Carnell, Fordham Law School professor and former
Treasury Assistant Secretary for Financial Institutions, that our current bank regulatory structure is
needlessly complex and costly for banks. He maintained that its overlapping jurisdictions and
responsibilities undercut regulators‘ accountability. And, it encourages regulators to compete with each
other for ―regulatory clientele‖ thereby creating an incentive for laxity in supervision. 68
These sentiments were echoed by Martin Baily, senior fellow with the Brookings Institution, and former
Chairman of the Council of Economic Advisers, who testified about the need for increased accountability
among regulators. In speaking about competition among regulators Baily said, ―The serious danger in
regulatory competition is that it allows a race to the bottom as financial institutions seek out the most
lenient regulator that will let them do the risky things they want to try, betting with other people‘s
money.‖ 69
The Committee also heard testimony that the number of banking regulators could be reduced by creating a
single federal regulator for state chartered banks, in contrast to the current scheme in which the Federal
Reserve and the FDIC each supervise certain state banks. According to Comptroller of the Currency,
John Dugan, ―Today there is virtually no difference in the regulation applicable to state banks at the
federal level based on membership in the [Federal Reserve] System and thus no real reason to have two
different federal regulators. It would be simpler to have one. Opportunities for regulatory arbitrage –
resulting, for example, from differences in the way federal activities restrictions are administered by one
or the other regulator –would be reduced. Policy would be streamlined.― Dugan went on to state the
importance of ensuring the FDIC maintain a window into day-to-day banking supervision, which would
be less of a problem for the Board if it maintained holding company supervision. 70
66 Testimony of Richard J. Hillman, Managing Director Financial Markets and Community Investment, GAO, to the Banking
Committee, 9/29/09.
67 Testimony of Eugene Ludwig to the Banking Committee, 9/29/09.
68 Testimony of Richard Carnell to the Banking Committee, September 29, 2009.
69 Testimony of Martin Baily to the Banking Committee, September 29, 2009.
70 Testimony of John Dugan to the Banking Committee, August 4, 2009.
20

Dugan identified further opportunity for regulatory consolidation. He testified there was little need for
separate holding company regulation where the bank is small or where it is the holding company‘s only,
or dominant, asset. ―Elimination of a separate holding company regulator thus would eliminate
duplication, promote simplicity and accountability, and reduce unnecessary compliance burden for
institutions as well. The case is harder and more challenging for the very largest bank holding companies
engaged in complex capital market activities, especially where the company is engaged in many, or
predominantly, nonbanking activities, such as securities and insurance.‖ In those cases, Dugan
recommended maintaining the role of the Board as the holding company supervisor. 71
In his September 2009 testimony, Baily echoed Dugan‘s remarks that there was no good case for the
Board to continue to supervise smaller bank holding companies. That regulation should be moved to the
prudential regulator. Indeed public data from the banking regulators from year end 2009 demonstrate that
in almost all instances of banking organizations with less than $50 billion in assets, the vast majority of
assets are in the depository institution. According to Federal Reserve Board Governor Daniel Tarullo,
―When a bank holding company is essentially a shell, with negligible activities or ownership stakes
outside the bank itself, holding company regulation can be less intensive and more modest in scope.‖ 72
Title III adopts a number of these recommendations for consolidating bank supervision to enhance the
accountability of individual regulators, reduce the opportunities for depository institutions to shop for the
most lenient regulator, reduce regulatory gaps in supervision, and limit inefficiencies, duplication and
needless regulatory burdens on the industry. Title III does so by abolishing the OTS in accordance with
the Administration‘s financial reform proposal.
Abolishing the OTS
The OTS is responsible for regulating state and federal thrifts, as well as their holding companies. 73 The
thrift charter suffered disproportionate losses during the financial crisis. According to FDIC data, 95
percent of failed depository institution assets in 2008 were attributable to thrifts regulated by the OTS.
These losses were predominantly attributed to the failures of Washington Mutual and Indy Mac Bank. 74
From the start of 2008 through the present, 73 percent of failed institution assets were attributable to
thrifts regulated by the OTS, even though the agency supervised only 12 percent of all bank and thrift
assets at the beginning of this period.
71 Id.
72 Testimony of Daniel Tarullo to the Banking Committee, August 4, 2009.
73 The OTS currently regulates 694 federal thrifts and 63 state thrifts.
74 In its reports of the Washington Mutual and IndyMac failures, the inspectors general offices of the Treasury and FDIC cited
numerous shortcomings with OTS supervision. With over $300 billion in total assets, Washington Mutual was OTS‘s largest
regulated institution and represented as much as 15 percent of OTS‘s total assessment revenue from 2003 to 2008. The
inspectors general found that, despite the multiple findings by OTS examiners of weaknesses at Washington Mutual, the OTS
consistently gave the bank a high composite rating (CAMELS – capital, assets, management, earnings, liquidity, and sensitivity
to risk) and Washington Mutual was thus considered well-capitalized until its closure. 74 They further concluded that OTS did
not adequately ensure that the thrift‘s management corrected examiner-identified weaknesses, that the agency failed to take
formal enforcement action until it was too late, and that the OTS never instituted corrective measures under ―prompt corrective
action‖ (PCA) to minimize losses to the Deposit Insurance Fund because the OTS never properly downgraded the bank‘s
CAMELS rating that would have triggered PCA. Evaluation of Federal Regulatory Oversight of Washington Mutual Bank,
Report No. EVAL-10-002, April 2010.
In the case of IndyMac, the Treasury Inspector General found that the OTS did not identify or sufficiently address the core
weaknesses that ultimately caused the thrift to fail until it was too late. As in the case of Washington Mutual, the Inspector
General found that the OTS gave IndyMac inflated CAMELS ratings, and , that it failed to follow up with bank management to
ensure that corrective actions were taken. The Inspector General also found that the OTS waited too long to bring an
enforcement action against the bank. Material Loss Review of IndyMac Bank, FSB (OIG-09-032).
21

In its White Paper on reforming the financial regulatory system, the Administration argues that advances
in the financial services industry have decreased the need for federal thrifts as a specialized class of
depository institutions focused on mortgage lending. 75 Additionally, the White Paper points out that the
thrift charter ―created opportunities for private sector arbitrage‖ of the regulatory system and that its focus
on residential mortgage lending made it particularly susceptible to the housing downturn. 76 The fragility
of the charter is borne out by the statistics, including the fact that total assets of OTS-supervised thrifts
declined by 36 percent between 2006 and 2009, compared to an increase of 11 percent in all FDICinsured
banks and thrifts for the same time period.
Thus the bill does not permit the chartering of any new federal thrifts and disbands the OTS. Title III
apportions the responsibility to regulate thrifts and thrift holding companies among the FDIC, the OCC
and the Federal Reserve Board, and ensures that all OTS employees are transferred to the FDIC and the
OCC.
Consolidating Federal Supervision of State Banks and Smaller Bank Holding Companies
Title III consolidates federal supervision for state banks in the FDIC. As of yearend 2009, the FDIC
regulated 4,941 state banks ranging in size from less than one billion dollars in assets to more than $100
billion in assets, compared to the 844 banks the Federal Reserve supervised. In addition to the state banks
the FDIC supervises, the agency has on-site dedicated examiners at the largest banks. The FDIC also
conducts targeted supervisory activities at specific Federal Reserve regulated banks over $10 billion.
These institutions present complex risk profiles and activities and operations that include international
operations, securitization activities, and trading books with material derivatives exposures. Thus, the
FDIC has ample experience in supervising banks of all sizes, including large, complex organizations.
Title III also gives the prudential regulators – the FDIC and the OCC – the responsibility for supervising
the holding companies of smaller, less complex organizations where nearly all of the assets in the holding
companies are concentrated in the depository institutions these agencies already regulate. The Federal
Reserve, however, will retain its supervisory responsibility for the larger bank holding companies and for
the larger thrift holding companies, thus ensuring that the Federal Reserve continues to have a window
into day-to-day supervision.
Focusing the Federal Reserve System on its Core Functions
The crisis exposed the shortcomings of the Federal Reserve System – mainly that it has too many
77 78
responsibilities to execute well. Currently, the Federal Reserve is responsible for conducting
75 ―Financial Regulatory Reform: A New Foundation‖, June 2009.
76 Id. The OTS was also the consolidated supervisor of AIG because AIG was a thrift holding company. To date, AIG‘s
failure has cost the U.S.government over $180 billion.
77 The Committee heard testimony about the failures of the Federal Reserve in executing its consumer protection functions, as
well as in identifying the risks in bank holding companies. Martin Eakes, CEO of Self-Help and CEO of the Center for
Responsible Lending, testified to the Committee in November 2008, ―The Board has been derelict in the duty to address
predatory lending practices. In spite of the rampant abuses in the subprime market and all the damage imposed on consumers
by predatory lending—billions of dollars in lost wealth—the Board has never implemented a single discretionary rule under
HOEPA outside of the high cost context. To put it bluntly, the Board has simply not done its job.‖
78 Speaking to its failures in identifying risk, Orice Williams, Director of Financial Markets and Community Investment at the
Government Accountability Office, testified to the Committee in March 2009, ―Although for some period, the Federal Reserve
analyzed financial stability issues for systemically important institutions it supervises, it did not assess the risks on an
integrated basis or identify many of the issues that just a few months later led to the near failure of some of these institutions
and to severe instability in the overall financial system.‖
22

monetary policy, policing the payment system, serving as the lender of last resort, supervising state
member banks, regulating all bank holding companies, and writing most of the consumer financial
protection rules.
Chairman Dodd and other members of the Committee repeatedly expressed concerns during hearings
about the many responsibilities of the Federal Reserve and about the need to preserve the Federal
Reserve‘s primary focus on its core function of monetary policy. The Chairman also expressed concerns
that so many diverse functions could ultimately threaten the independence of the Federal Reserve‘s
monetary policy. Chairman Dodd said, ―Some have expressed a concern—which I share, by the way—
about overextending the Fed when they have not properly managed their existing authority, particularly in
the area of protecting consumers.‖ 79 The Chairman also said, ―I worry that over the years loading up the
Federal Reserve with too many piecemeal responsibilities has left important duties without proper
attention and exposed the Fed to dangerous politicization that threatens the very independence of this
institution.‖ 80 Ranking Member Shelby stated, ―The Federal Reserve already handled monetary policy,
bank regulation, holding company regulation, payment systems oversight, international banking
regulation, consumer protection, and the lender-of-last-resort function. These responsibilities conflict at
times, and some receive more attention than others. I do not believe that we can reasonably expect the Fed
or any other agency [to] effectively play so many roles.‖ 81
In response to a question from Ranking Member Shelby, Former Federal Reserve Chairman Paul Volcker
agreed that the Federal Reserve‘s conduct of monetary policy could be undermined if the Fed assumed
additional responsibilities. 82 Chairman Volcker further testified, ―You will have a different Federal
Reserve if the Federal Reserve is going to do the main regulation or all the regulation from a prudential
standpoint. And you'll have to consider whether that's a wise thing to do, given their primary -- what's
considered now their primary responsibilities for monetary policy. They obviously have important
regulatory functions now, and maybe those functions have not been pursued with sufficient avidity all the
time. But if you're going to give them the whole responsibility, for which there are arguments, I do think
you have to consider whether that's consistent with the degree of independence that they have to focus on
monetary policy.‖ 83
To narrow the focus of the Federal Reserve to its core functions, the bill strips it of its consumer
protection functions, 84 and its role in supervising a relatively small number of state banks, as well as
smaller bank holding companies. However, the Committee was persuaded that because of the Federal
Reserve‘s expertise and its other unique functions, it should play an expanded role in maintaining
79 Statement of Chairman Chris Dodd, hearing of the Banking Committee, 12/3/09
80 Statement of Chairman Chris Dodd, hearing of the Banking Committee, 2/4/09
81 Ranking Member Richard Shelby, Banking Committee hearing, 6/18/09
82 Banking Committee hearing, ―Modernizing The U.S. Financial Regulatory System,‖ 2/4/09
83 Testimony of Former Federal Reserve Board Chairman Paul Volcker to the Banking Committee, February 9, 2009.
84 In proposing to take away the Federal Reserve‘s authority to write and enforce consumer protection rules Secretary Geithner
called this authority a ―preoccupation and distraction‖ for the Federal Reserve in testimony to the Banking Committee, June 18,
2009.
Martin Baily, Senior Fellow of Economic Studies at the Brookings Institution, stated in testimony during a hearing in
September 2009 that the Federal Reserve Board‘s added focus on consumer protection took time from properly doing the rest
of its job: ―I think the thing that the Federal Reserve has done well is monetary policy … they certainly haven't done a great job
on prudential regulation and I don't see--what is the point of the Chairman of the Federal Reserve sitting around worrying about
details of credit card regulation That is what he is doing right now, and I think that is a mistake and not a good use of his
time.‖
23

financial stability. 85 Thus, Title III assigns the Federal Reserve the responsibility for the supervision of
bank and thrift holding companies with total consolidated assets of $50 billion ore more. (Other aspects
of the bill that address financial stability enhance the Federal Reserve‘s oversight of systemically
important payment systems, direct the Federal Reserve to apply heightened prudential standards to large
bank holding companies, and give the Federal Reserve supervisory responsibilities over designated
nonbank financial companies.) To ensure the Federal Reserve can focus on these and its other essential
responsibilities, the bill assigns the regulation of state member banks and smaller bank holding companies
to other federal regulators. The bill therefore strikes an important balance in providing the Federal
Reserve with enhanced authority to maintain financial stability, while at the same time, reducing its
responsibilities for areas that are not central to its mission.
Finally, it should be noted that Title III leaves intact the Federal Reserve‘s ability to obtain information
needed for the conduct of monetary policy. Section 11 of the Federal Reserve Act gives the Board of
Governors authority to require any depository institution to provide ―such reports of its liabilities and
assets as the Board may determine to be necessary or desirable to enable the Board to discharge its
responsibility to monitor and control monetary and credit aggregates.‖ This information may be obtained
from any bank, savings and loan association, or credit union, and does not depend on the chartering
agency or regulator of the depository. In addition, section 21 of the Federal Reserve Act provides that the
Board may conduct special examinations of any Federal Reserve member bank. Members include all
national banks and state banks that elect to become members of their district Federal reserve bank. These
provisions of the Federal Reserve Act remain unchanged. Therefore the Federal Reserve will retain
extensive powers to gather the data it needs to conduct monetary policy, including data from banks that it
does not supervise.
REGULATION OF OVER-THE-COUNTER DERIVATIVES AND SYSTEMICALLY
SIGNIFICANT PAYMENT, CLEARING, AND SETTLEMENT FUNCTIONS
―Making derivatives safer is a very important part of solving too-big-to-fail.‖ 86
– Chairman Ben Bernanke
Many factors led to the unraveling of this country‘s financial sector and the government intervention to
correct it, but a major contributor to the financial crisis was the unregulated over-the-counter (―OTC‖)
derivatives market. Derivatives can trade either over-the-counter where contracts are often customized
and privately negotiated between counterparties, or through regulated central clearinghouses and
exchanges that establish rules for trading contracts among many different counterparties.
Massive growth in bilateral, unregulated derivatives trading: At the time of the crisis in December, 2008,
the global over-the-counter derivatives market stood at $592 trillion. 87 The top five derivatives dealers in
the United States accounted for 96 percent of outstanding over-the-counter contracts made by the leading
bank holding companies, according to the OCC. As such, this market was dominated by the too-big-tofail
financial companies that trade derivatives with financial and non-financial users. The dangers posed
by the OTC derivatives market have been known for many years. In 1994, the GAO produced a report,
titled, ―Financial Derivatives: Actions Needed to Protect the Financial System.‖ At the time of their
85 "The Fed has several missions, and monetary policy is the primary one," said Alice Rivlin, a Brookings Institution scholar
and former Fed vice chairman. "But they also have a mission to stabilize the banking system, and we're in the process of
expanding our view of what the banking system is." Washington Post, 7/17/08
86 Testimony of Ben Bernanke, Federal Reserve Board Chairman, to the Senate Banking Committee, 12/3/09.
87 Bank for International Settlements, press release, 5/19/09.
24

eport, the GAO determined the size of the derivatives market to be $12.1 trillion. Included in GAO‘s
findings in 1994 were concerns about risks to taxpayers arising from the interconnectedness between
dealers and end users: ―the rapid growth and increasing complexity of derivatives activities increase risks
to the financial system, participants, and U.S. taxpayers;‖ and ―relationships between the 15 major U.S.
dealers that handle most derivatives activities, end users, and the exchange-traded markets makes the
failure of any one of them potentially damaging to the entire financial market.‖ 88 By the time of the 2008
crisis, the derivatives market had grown to be almost fifty times as large from when GAO raised a red
flag. Much of this growth has been attributed to the Commodities Futures Modernization Act of 2000
which explicitly exempted OTC derivatives, to a large extent, from regulation by the Commodity Futures
Trading Commission (―CFTC‖) and limited the SEC‘s authority to regulate certain types of OTC
derivatives. By 2008, 59 percent of derivatives were traded over-the-counter, or away from regulated
exchanges, compared to 41 percent in 1998.
According to the Obama Administration, ―the downside of this lax regulatory regime…became
disastrously clear during the recent financial crisis…many institutions and investors had substantial
positions in credit default swaps—particularly tied to asset backed securities…excessive risk taking by
AIG and certain monoline insurance companies that provided protection against declines in the value of
such asset backed securities, as well as poor counterparty credit risk management by many banks, saddled
our financial system with an enormous—and largely unrecognized—level of risk.‖ ―[T]he sheer volume
of these contracts overwhelmed some firms that had promised to provide payment on the CDS and left
institutions with losses that they believed they had been protected against. Lacking authority to regulate
the OTC derivatives market, regulators were unable to identify or mitigate the enormous systemic threat
that had developed.‖ 89
OTC contracts can be more flexible than standardized contracts, but they suffer from greater counterparty
and operational risks and less transparency. Information on prices and quantities is opaque. This can lead
to inefficient pricing and risk assessment for derivatives users and leave regulators ill-informed about
risks building up throughout the financial system. Lack of transparency in the massive OTC market
intensified systemic fears during the crisis about interrelated derivatives exposures from counterparty risk.
These counterparty risk concerns played an important role in freezing up credit markets around the
failures of Bear Stearns, AIG, and Lehman Brothers.
Hidden leverage due to under-collateralization: Although over-the-counter derivatives can be used to
manage risk and increase liquidity, they also increase leverage in the financial system; traders can take
large speculative positions on a relatively small capital base because there are no regulatory requirements
for margin or capital. The ability of derivatives to hide leverage was evident in problems faced by
financial companies such as Bear Stearns and Lehman as well as non-financial derivatives participants
such as the government of Greece—Chairman Gensler recently stated that higher capital requirements for
derivatives would have prevented Greece from using currency swaps to hide debt. 90 When users negotiate
margin bilaterally, they ―will act in their own interest to manage their risk. These actions may not take
into account the spillover risk throughout the system.‖ 91 For example, the markets generally considered
AIG Financial Products (―AIGFP‖) an extremely low risk counterparty because its parent company was
rated AAA. This high rating allowed AIGFP to hold lower capital/margin against its derivatives
portfolio. Had market participants or regulators demanded more capital, the company would have had
88 U.S. Government Accountability Office, ―Financial Derivatives: Actions Needed to Protect the Financial System,‖ GGD-94-
133 May 18, 1994
89 Obama Administration white paper, Financial Regulatory Reform: A New Foundation, June 2009
90 Associated Press, U.S. Warns EU Derivatives Ban Won‘t Work, 3/16/10
91 Acharya, et al, The Ultimate Financial Innovation, 2008
25

less incentive to enter into such large positions as the projected return on investment would have been
lower. Even if AIGFP had such large positions, the company would have had more funds to apply to the
losses. Had information been more readily available to regulators and counterparties about the scope of
AIGFP‘s credit default swap positions, regulators and market participants might have detected the
systemic implications of AIGFP‘s book.
The dangers of under-collateralization were recently identified by the International Monetary Fund
(―IMF‖) and the Wall Street Journal:
―The main risk posed by this gigantic pool is the hidden leverage. Put simply, a bank may have a
large derivatives position but avoid posting cash upfront with its trading partner as others do.
This "under-collateralization" makes the system prone to runs because, when instability arrives, all
banks rush to collect what they are owed on derivatives—and try to delay paying out what they
themselves owe. Witness the Lehman Brothers collapse. And the numbers aren't small.
On Tuesday, the International Monetary Fund released a paper estimating that five large U.S.
derivatives dealers were potentially under-collateralized by between $500 billion and $275 billion
as of September 2009. The IMF gets to that range using firms' net derivatives liabilities, a figure
showing how much banks owe on derivatives trades adjusted for netting and collateral posting.
Putting nearly all derivatives through clearinghouses, with tough margin rules, could do away with
most of the under-collateralization. The IMF says getting there could be very costly for the banks.
But consider it a bill they should have paid years ago.‖ 92
Counterparty credit exposure in the derivatives market was largely seen as a source of systemic risk
during the failures of both Bear Stearns and Lehman Brothers, and would have brought down AIG but for
a massive collateral payment made with taxpayer money. It created the dangerous interconnections that
spread and amplified risk across the entire financial system. More collateral in the system, through
margin requirements, will help protect taxpayers and the economy from bailing out companies‘ risky
derivatives positions in the future. In testimony before the Senate Banking Committee, Federal Reserve
Chairman Bernanke described margin requirements for derivatives users as ―an appropriate cost of
protecting against counterparty risk.‖ 93
Need to reduce systemic risk build-up and risk transmission in the derivatives market: Chairman Gensler
of the Commodity Futures Trading Commission described the flaws of bilaterally-negotiated margin as
follows: ―Even though individual transactions with a financial counterparty may seem insignificant, in
aggregate, they can affect the health of the entire system.‖ 94 ―One of the lessons that emerged from this
recent crisis was that institutions were not just ‗too big to fail,‘ but rather too interconnected as well. By
mandating the use of central clearinghouses, institutions would become much less interconnected,
mitigating risk and increasing transparency. Throughout this entire financial crisis, trades that were
carried out through regulated exchanges and clearinghouses continued to be cleared and settled.‖ 95
In July of 2008, during a hearing on derivatives regulation before the Senate Banking Committee, Patrick
Parkinson, deputy director of the Division of Research and Statistics for the Board of Governors of the
92 Wall Street Journal, 4/13/10
93 Chairman Bernanke, Senate Banking Committee testimony, 12/3/09
94 Chairman Gensler, Senate Agriculture Committee testimony, 11/18/09
95 Chairman Gensler, Senate Banking Committee testimony, 6/22/09
26

Federal Reserve System, testified to the danger present in the OTC derivatives market: ―weaknesses in the
infrastructure for the credit derivatives markets and other OTC derivatives markets have created
operational risks that could undermine the effectiveness of counterparty risk-management practices.‖ 96 In
June of 2009, A. Patricia White, the associate director of the Division of Research and Statistics for the
Board of Governors of the Federal Reserve System, testified about unregulated derivatives‘ ability to
spread harm through the system and the need to combat such risk. Ms. White said, ―OTC derivatives
appear to have amplified or transmitted shocks. An important objective of regulatory initiatives related to
OTC derivatives is to ensure that improvements to the infrastructure supporting these products reduce the
likelihood of such transmissions and make the financial system as a whole more resilient to future shocks.
Centralized clearing of standardized OTC products is a key component of efforts to mitigate such
systemic risk.‖ 97 While the systemic risk presented by the unregulated OTC derivatives market has long
been known, it was realized in 2008 with devastating consequences. Now it must be addressed to restore
stability and confidence in the financial system.
Creating A Safer Derivatives Market To Protect Taxpayers Against Future Bailouts
As a key element of reducing systemic risk and protecting taxpayers in the future, protections must
include comprehensive regulation and rules for how the OTC derivatives market operates. Increasing the
use of central clearinghouses, exchanges, appropriate margining, capital requirements, and reporting will
provide safeguards for American taxpayers and the financial system as a whole.
Under Title VII, for the first time, over-the-counter derivatives will be regulated by the SEC and the
CFTC, more transactions will be required to clear through central clearing houses and trade on exchanges,
un-cleared swaps will be subject to margin requirements, swap dealers and major swap participants will
be subject to capital requirements, and all trades will be reported so that regulators can monitor risks in
this vast, complex market. Under Title VIII, the Federal Reserve will be granted the authority to regulate
and examine systemically important payment, clearing, and settlement functions. The overall result
would be reduced costs and risks to taxpayers, end users, and the system as a whole. The language in
these titles is based on proposals drafted by the Obama Administration and includes all of the key
regulatory features for derivatives market reform that have been endorsed by the G20: more central
clearing, exchange trading, capital, margin, and transparency.
G20 Steering Group Letter, 3/31/10: ―Standardized over-the-counter derivatives contracts should
be traded on exchanges or electronic platforms, where appropriate, cleared through central
clearing counterparties by 2012 at the latest, and reported to trade repositories.‖ 98
G20 Leaders' Statement, The Pittsburgh Summit, 9/25/09: ―Improving over-the-counter
derivatives markets: All standardized OTC derivative contracts should be traded on exchanges or
electronic trading platforms, where appropriate, and cleared through central counterparties by end-
2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally
cleared contracts should be subject to higher capital requirements. We ask the FSB and its relevant
members to assess regularly implementation and whether it is sufficient to improve transparency
in the derivatives markets, mitigate systemic risk, and protect against market abuse.‖ 99
96 Testimony before the Subcommittee on Securities, Insurance, and Investment of the Senate Committee on Banking,
Housing, and Urban Affairs, 7/9/08
97 Testimony before the Subcommittee on Securities, Insurance, and Investment of the Senate Committee on Banking,
Housing, and Urban Affairs, 6/22/09
98 G20 Steering Group Letter, 3/31/10
99 G20 Leaders' Statement, The Pittsburgh Summit, 9/25/09, http://www.pittsburghsummit.gov/mediacenter/129639.htm
27

The combination of these new regulatory tools will provide market participants and investors with more
confidence during times of crisis, taxpayers with protection against the need to pay for mistakes made by
companies, derivatives users with more price transparency and liquidity, and regulators with more
information about the risks in the system.
Central clearing, margin, and capital requirements as a systemic risk management tool: ―The main tool
for regulating contagion and systemic risk is liquidity reserves (margin).‖ 100 In the OTC market, margin
requirements are set bilaterally and do not take account of the counterparty risk that each trade imposes on
the rest of the system, thereby allowing systemically important exposures to build up without sufficient
capital to mitigate associated risks. The problem of under-collateralization is especially apparent in bank
transactions with non-financial firms and regulators should address this problem through the new margin
requirements for uncleared derivatives established in the legislation. According to the Comptroller of the
Currency, ―Banks held collateral against 64 percent of total net current credit exposure (―NCCE‖) at the
end of the third quarter. Bank credit exposures to banks/securities firms and hedge funds are very well
secured. Banks hold collateral against 90 percent of their exposure to banks and securities firms, and 219
percent of their exposure to hedge funds. The high coverage of hedge fund exposures occurs because
banks take ‗initial margin‘ on transactions with hedge funds, in addition to fully securing any current
credit exposure. Coverage of corporate, monoline and sovereign exposures is much less.‖ 101
With appropriate collateral and margin requirements, a central clearing organization can substantially
reduce counterparty risk and provide an organized mechanism for clearing transactions. For uncleared
swaps, regulators should establish margin requirements. In addition, regulators should also impose
capital requirements on swap dealers and major swap participants. While large losses are to be expected
in derivatives trading, if those positions are fully margined there will be no loss to counterparties and the
overall financial system and none of the uncertainty about potential exposures that contributed to the
panic in 2008.
Exchange trading as a price transparency mechanism: ―While central clearing would mitigate
counterparty risk, central clearing alone is not enough. Exchange trading is also essential in order to
provide price discovery, transparency, and meaningful regulatory oversight of trading and
intermediaries,‖ said Former CFTC Chairman Brooksley Born. 102 Exchange trading can provide pre- and
post- trade transparency for end users, market participants, and regulators. When swaps are executed on
the basis of robust price information, rather than privately quoted, the cost of those transactions can be
reduced over time. ―The relative opaqueness of the OTC market implies that bid/ask spreads are in many
cases not being set as competitively as they would be on exchanges. This entails a loss in market
efficiency,‖ wrote Stanford University Professor Darrel Duffie. 103 Trading more derivatives on regulated
exchanges should be encouraged because it will result in more price transparency, efficiency in execution,
and liquidity. In order to allow the OTC market to adapt to more exchange-trading, the legislation
provides for ―alternative swap execution facilities‖ (―ASEF‖) to fulfill the exchange-trading mandate.
The absence of an exchange trading mandate provides ―supra-normal returns paid to the dealers in the
closed OTC derivatives market [and] are effectively a tax on other market participants, especially
investors who trade on open, public exchanges,‖ according to International Risk Analytics co-founder
Christopher Whalen. 104 Resistance to price transparency in the financial markets has been overcome in
the past, as noted by Duffie: ―About 6 years ago, a post-trade reporting system known as TRACE was
100 Rama Conti, Columbia University, Credit Derivatives: Systemic Risk and Policy Options, 2009
101 Comptroller of the Currency, Quarterly Report on Bank Trading and Derivatives Activities, 12/18/09
102 Former CFTC Chairman Brooksley Born, Joint Economic Committee testimony, 12/1/09
103 Stanford University Professor Darrel Duffie, The Road Ahead for the Fed, 2009
104 International Risk Analytics co-founder Christopher Whalen, Senate Banking Committee testimony, 6/22/09
28

forced by U.S. regulation into the OTC markets for corporate and municipal bonds, which operate in a
manner that is otherwise similar to the OTC derivatives markets. Dealers resisted the introduction of
TRACE, claiming that more price transparency would reduce the incentives of dealers to make markets
and in the end reduce market liquidity. So far, empirical evidence appearing in the academic literature
has not given much support to these claims.‖ 105
Allow for some customized, bilateral contracts: Some parts of the OTC market may not be suitable for
clearing and exchange trading due to individual business needs of certain users. Those users should retain
the ability to engage in customized, uncleared contracts while bringing in as much of the OTC market
under the centrally cleared and exchange-traded framework as possible. Also, OTC (contracts not cleared
centrally) should still be subject to reporting, capital, and margin requirements so that regulators have the
tools to monitor and discourage potentially risky activities, except in very narrow circumstances. These
exceptions should be crafted very narrowly with an understanding that every company, regardless of the
type of business they are engaged in, has a strong commercial incentive to evade regulatory requirements.
―Every firm has reasons why its contracts are ‗exceptional‘ and should trade privately; in reality, most
derivatives contracts are standardized-or standardizable-and could trade on exchanges,‖ said Joe Dear,
Chief Investment Officer of the California Public Employees' Retirement System. 106
Therefore, the legislation permits regulators to exempt contracts from the clearing and exchange trading
requirement based on these narrow criteria: one counterparty is not a swap/security-based swap dealer or
major swap/security-based swap participant and does not meet the eligibility requirements of a
clearinghouse. If no clearinghouse, board of trade, exchange, or alternative swap execution facility
accepts the contract for clearing or trading, then the contract must be exempt from the clearing and
exchange trading requirements. The regulators may also exempt swaps from the margin requirement for
uncleared swaps under the following narrow criteria: one counterparty is not a swap/security-based swap
dealer or major swap/security-based swap participant, using the swap as part of an effective hedge under
generally accepted accounting principles, and predominantly engaged in activities that are not financial in
nature. Regulators must notify the Financial Stability Oversight Council before issuing any permissive
exemptions.
In providing exemptions, regulators should minimize making distinctions between the types of firms
involved in the market or the types of products the firms are engaged in and instead evaluate the nature of
the firm‘s derivatives activity: ―[T]wo complementary regulatory regimes must be implemented: one
focused on the dealers that make the markets in derivatives and one focused on the markets themselves –
including regulated exchanges, electronic trading systems and clearing houses…These two regimes
should apply no matter which type of firm, method of trading or type of derivative or swap is involved,‖
testified Chairman Gensler. 107 To achieve the objectives of regulatory reform in the OTC market,―it is
critical that similar products and activities be subject to similar regulations and oversight.‖ 108
In determining whether to bring non-swap dealers into the regulatory framework, regulators should focus
on counterparty credit exposure. It was counterparty credit risk that played a critical role in exacerbating
the 2008 crisis. Regulators would measure credit exposure by evaluating the value of collateral held
against such exposure. According to the Office of the Comptroller of the Currency, ―the first step to
measuring credit exposure in derivative contracts involves identifying those contracts where a bank would
105 Stanford University Professor Darrel Duffie, Pew Research, 2009
106 Chief Investment Officer of the California Public Employees' Retirement System Joe Dear, National Press Club speech,
11/3/09
107 Chairman Gensler, Senate Banking Committee testimony, 6/22/09
108 Obama Administration white paper, Financial Regulatory Reform: A New Foundation, June 2009
29

lose value if the counterparty to a contract defaulted today… A more risk sensitive measure of credit
exposure would also consider the value of collateral held against counterparty exposures.‖ 109
INVESTOR PROTECTION
Title IX addresses a number of securities issues, including provisions that responds to significant aspects
of the financial crisis caused by poor securitization practices (Subtitle D); erroneous credit ratings
(Subtitle C); ineffective SEC regulation of Madoff Securities, Lehman Brothers and other firms (Subtitle
F); and executive compensation practices that promoted excessive risk-taking (Subtitle E). In connection
with the crisis, concerns have also been raised that investors need more protection; shareholders need a
greater voice in corporate governance; the SEC needs more authority; the SEC should be self-funded; and
the municipal securities markets need improved regulation, which are addressed here as well.
Significant aspects of the financial crisis involved securities. Serious and far reaching problems were
caused by poor and risky securitization practices; erroneous credit ratings; ineffective SEC regulation of
investment banks such as Lehman Brothers and broker dealers such as Madoff; and excessive
compensation incentives that promoted excessive risk taking. During the crisis, it became apparent that
investors needed better protection, shareholders needed more voice in corporate governance, the
municipal securities markets needed improved regulation, and the SEC needs assistance. Title IX
addresses these and other investor protection and related securities issues.
Credit ratings that vastly understated the risks of complex mortgage-backed securities encouraged the
build-up of excessive leverage and credit risk throughout the financial system in the years before the
crisis. With the onset of the crisis, the ratings of many mortgage-backed bonds were sharply downgraded,
fuelling widespread uncertainty about asset values and amplifying problems in residential mortgage
markets into a global financial panic. The rating agencies‘ errors can be attributed to overreliance on
mathematical risk models based on inadequate data and to conflicts of interest in the process of rating
complex structured securities, where the rating agencies actually advised the issuers on how to obtain
AAA ratings, without which the securities could not have been sold.
This legislation will improve the regulation and performance of credit rating agencies by enhancing SEC
oversight authority and requiring more robust internal supervision of the ratings process. In addition,
rating agencies will be required to disclose more data about assumptions and methodologies underlying
ratings, in order to permit investors to better understand credit ratings and their limitations. Due diligence
investigations into the facts underlying ratings will be encouraged. Rating agencies will be held
accountable for failures to produce ratings with integrity, both by allowing the SEC to suspend rating
agencies that consistently fail to produce accurate ratings and by lowering the pleading standard for
private lawsuits alleging that a rating agency knowingly or recklessly failed to conduct a reasonable
investigation of the factual elements of the rated security, or failed to obtain reasonable verification of
such factual elements from independent sources that it considered to be competent. Finally, the legislation
requires financial regulators to review and remove unnecessary references to credit ratings in their
regulations.
Excesses and abuses in the securitization process played a major role in the crisis. Under the ―originate to
distribute‖ model, loans were made expressly to be sold into securitization pools, which meant that the
lenders did not expect to bear the credit risk of borrower default. This led to significant deterioration in
credit and loan underwriting standards, particularly in residential mortgages. Moreover, investors in assetbacked
securities could not assess the risks of the underlying assets, particularly when those assets were
109 Comptroller of the Currency, Quarterly Report on Bank Trading and Derivatives Activities, 12/18/09
30

esecuritized into complex instruments like collateralized debt obligations. With the onset of the crisis,
there was widespread uncertainty regarding the true financial condition of holders of asset-backed
securities, freezing interbank lending and constricting the general flow of credit. Complexity and opacity
in securitization markets prolonged and deepened the crisis, and have made recovery efforts much more
difficult.
This title requires securitizers to retain an economic interest in a material portion of the credit risk for any
asset that securitizers transfer, sell, or convey to a third party. This ―skin in the game‖ requirement will
create incentives that encourage sound lending practices, restore investor confidence, and permit
securitization markets to resume their important role as sources of credit for households and businesses.
Congress is empowering shareholders in a public company to have a greater voice on executive
compensation and to have more fairness in compensation affairs. Under the new legislation, each
publicly traded company would give its shareholders the right to cast advisory votes on whether they
approve of its executive compensation. The board committee that sets compensation policy would consist
only of directors who are independent. The company would tell shareholders about the relationship
between the executive compensation it paid and its financial performance. The company would be
required to have a policy to recover money that it erroneously paid to executives based on financials that
later had to be restated due to an accounting error.
Management nominees for directors of public companies could generally serve on the board only if they
won a majority of the votes in an uncontested election. Also, the S.E.C. would have the authority to allow
shareholders to have more power in governing the public companies in which they own stock. If the
S.E.C. gives shareholders proxy access, a shareholder who has owned an amount of stock for a period of
time, as specified by the S.E.C., could choose a candidate to nominate for election to the board of
directors on the company's proxy.
Investors would have new sources of assistance. The new Office of Investor Advocate housed within the
SEC would help retail investors with problems they have with the SEC or self-regulatory organizations.
Securities broker-dealers, such as Bernard L. Madoff Investment Securities, would have to use auditors
that are subject to the inspections and discipline by a rigorous regulator, the Public Company Accounting
Oversight Board, which would better protect investor accounts. Larger investors would have to post
margin collateral based on the net positions in their securities and futures portfolio. An Investment
Advisory Committee is created in the law to give advice to the SEC from its members, which would
include representatives of mutual fund, stock and bond investors, senior citizens, State securities
regulators, and others. The law increases the amount of money available to the Securities Investor
Protection Corporation to pay off valid claims of customers of defunct broker-dealers.
The SEC would get more power, assistance and money at its disposal to be an effective securities markets
regulator. The SEC would have new authority to impose limitation on mandatory arbitration; to bar
someone who violated the securities laws while working for one type of registered securities firm, such as
a broker-dealer, from working for other types of securities firms, such as investment advisers; to require
that securities firms give new disclosures to investors before they buy investment products. The SEC
would have more help in identifying securities law violations through a new, robust whistleblower
program designed to motivate people who know of securities law violations to tell the SEC. It also
expands existing whistleblower law. In light of recent failures of the SEC, the GAO will also provide
assistance through studies and recommendations to improve the agency‘s internal supervisory controls,
management and financial controls. The SEC has asked to be unfettered by the Congressional
appropriation process and the new law would allow the agency to be self-funded.
31

A major lesson from the crisis is the importance of transparency in financial markets. The $3 trillion
municipal securities market is subject to less supervision than corporate securities markets, and market
participants generally have less information upon which to base investment decisions. During the crisis, a
number of municipalities suffered losses from complex derivatives products that were marketed by
unregulated financial intermediaries. This title requires a range of municipal financial advisors to register
with the SEC and comply with regulations issued by the Municipal Securities Rulemaking Board
(MSRB). The composition of the MSRB will be changed so that representatives of the public—including
investors and municipalities—make up a majority of the board. In addition, the title establishes an Office
of Municipal Securities within the SEC and contains a number of studies on ways to improve disclosure,
accounting standards, and transparency in the municipal bond market.
REGULATION OF PRIVATE FUNDS
Title IV requires advisers to large hedge funds to register with the Securities and Exchange Commission,
in order to close a significant gap in financial regulation. Because hedge funds are currently unregulated,
no precise data regarding the size and scope of hedge fund activities are available, but the common
estimate is that the funds had at least $2 trillion in capital before the crisis. Their impact on the financial
system can be magnified by extensive use of leverage—their trades can move markets. While hedge funds
are generally not thought to have caused the current financial crisis, information regarding their size,
strategies, and positions could be crucial to regulatory attempts to deal with a future crisis. The case of
Long-Term Capital Management, a hedge fund that was rescued through Federal Reserve intervention in
1998 because of concerns that it was ―too-interconnected-to-fail,‖ shows that the activities of even a
single hedge fund may have systemic consequences.
Hedge fund registration was part of the Treasury‘s Department‘s regulatory reform proposal, and has been
endorsed by many witnesses before the Committee, including Mr. James Chanos, Chairman of the
Coalition of Private Investment Companies, who testified that ―private funds (or their advisers) should be
required to register with the SEC.…Registration will bring with it the ability of the SEC to conduct
examinations and bring administrative proceedings against registered advisers, funds, and their personnel.
The SEC also will have the ability to bring civil enforcement actions and to levy fines and penalties for
violations.‖ 110 Other supporters of the title include a range of industry groups, institutional investors, the
Group of Thirty, the G-20, and the Investors‘ Working Group.
In addition to SEC registration, this title requires private funds—hedge funds with more than $100 million
in assets under management—to disclose information regarding their investment positions and strategies.
The required disclosures include information on fund size, use of leverage, counterparty credit risk
exposure, trading and investment positions, valuation policies, types of assets held, and any other
information that the SEC, in consultation with the Financial Stability Oversight Council, determines is
necessary and appropriate to protect investors or assess systemic risk. The Council will have access to this
information to monitor potential systemic risk, while the SEC will use it to protect investors and market
integrity.
III. BACKGROUND AND NEED FOR LEGISLATION
The statistics alone reveal the terrible toll the financial crisis exacted on the U.S. economy. From the start
of the crisis through March 2010, more than 8 million jobs were lost. 111 Unemployment in the United
110 Testimony of James Chanos, Chairman, Coalition of Private Investment Companies, to the Senate Banking Committee,
7/15/09
111 Bureau of Labor Statistics, database of seasonally adjusted total nonfarm payroll, www.bls.gov
32

States reached 10.1% in October 2009, the highest rate of unemployment since 1983, and as of March
2010 was holding at 9.7%; prior to the economic collapse, in October 2008, the unemployment rate was
just 6.6%. 112 American household wealth fell by more than $13 trillion from the peak value of American
wealth in 2007 to the height of the crisis at the end of 2008. Even after several months of recovery,
household wealth is still down $11 trillion, or almost 17%, from its 2007 peak. 113 Home prices have
dropped 30.2% from their 2006 peak, 114 and retirement assets dropped by more than 20%. Real Gross
Domestic Product in the United States in the fourth quarter of 2008, and the first and second quarters of
2009 decreased by an annual rate of about 5.4%, 6.4%, and 0.7%, respectively, from the previous periods,
and Real GDP through 2009 had not reached the levels seen prior to the economic collapse. 115 More than
7 million homes in America have entered foreclosure since the beginning of 2007. 116
Behind the statistics are hardworking men and women whose lives have been shattered, small businesses
that have been shuttered, retirement funds that have evaporated, and families who have lost their homes.
While some of the most prominent American financial institutions have been destroyed or badly
weakened, it is the millions of American families, who did nothing wrong, who have suffered the most.
Indeed, the financial crisis has torn at the very fiber of our middle class.
This devastation was made possible by a long-standing failure of our regulatory structure to keep pace
with the changing financial system and prevent the sort of dangerous risk-taking that led us to this point,
propelled by greed, excess, and irresponsibility. The United States‘ financial regulatory structure,
constructed in a piecemeal fashion over many decades, remains hopelessly inadequate to handle the
complexities of modern finance. In January 2009, the GAO added the U.S. financial regulatory system to
its list of high-risk areas of government operations because of its fragmented and outdated structure. 117
Rather than taking measures to strengthen the financial services sector, some of our regulators actively
embraced deregulation, pushed for lower capital standards, ignored calls for greater consumer protections
and allowed the companies they supervised to use complex financial instruments to manage risk that
neither they nor the companies really understood. Moreover, many actors in the financial system – the
―shadow‖ banking system -- have escaped any form of meaningful regulation. As former Comptroller of
the Currency Eugene Ludwig testified, ―The paradigm of the last decade has been the conviction that unor
under‐regulated financial services sectors would produce more wealth, net‐net. If the system got sick,
the thinking went, it could be made well through massive injections of liquidity. This paradigm has not
merely shifted—it has imploded.‖ 118
The financial crisis can trace its origins to a downturn in the housing market that in turn exposed a raft of
unsound lending practices. These practices ultimately led to the failure of a number of companies heavily
involved in making or investing in subprime loans. On April 2, 2007, New Century Financial
Corporation, a leading subprime mortgage lender, filed for Chapter 11 bankruptcy. Quickly, the first
signs of trouble in the housing market came to Wall Street. In June of 2007, Bear Stearns suspended
redemptions from one of its funds and in July of 2007, Bear Stearns liquidated two of its hedge funds that
were heavily invested in mortgage-backed securities. On August 6, a large retail mortgage lender,
American Home Mortgage Investment Corporation, filed for Chapter 11 bankruptcy. In December of
2007, the Federal Reserve, after announcing several cuts to interest rates of both the federal funds rate and
112 Bureau of Labor Statistics, database of seasonally adjusted unemployment rate, 16 years and older, www.bls.gov
113 The Federal Reserve, Flow of Funds report, 3/11/10, www.federalreserve.gov
114 S&P/Case-Shiller Home Prices Indices, 20-City Composite, press release, 3/30/10, www.standardandpoors.com
115 Bureau of Economic Analysis, Gross Domestic Product: Fourth Quarter 2009 press release, 3/26/10, www.bea.gov
116 Reuters News, January 29, 2008; January 15, 2009; January 14, 2010; March 11, 2010
117 GAO, High Risk Series: An Update, GAO-09-271 (Washington, D.C.: Jan. 2009)
118 Testimony before the Senate Committee on Banking, Housing, and Urban Affairs, 10/16/08
33

the primary credit rate over the previous months, announced the creation of a Term Auction Facility to
address pressures in the short-term funding markets. In March of 2008, the Federal Reserve announced
an additional short-term lending facility, the Term Securities Lending Facility to promote liquidity in the
financial markets. 119
On March 14, 2008, the first major shock wave spread across Wall Street when the Federal Reserve
announced the bailout of Bear Stearns through an arrangement with JPMorgan Chase. Bear Stearns,
whose assets were concentrated in mortgage-backed securities, faced a major liquidity crisis as it failed to
find buyers for its now-toxic assets. Just days later, on March 16, JPMorgan Chase agreed to buy all of
Bear Stearns with assistance from the Federal Reserve. 120
In the months that followed the crisis grew more severe. On July 11, 2008, the OTS closed IndyMac
BankFSB, a large thrift saddled with nonperforming mortgages. IndyMac had relied on an ―originate-todistribute‖
model of mortgage lending, 121 under which it originated loans or brought them from others,
and then packaged them together in securities and sold them on the secondary market to banks, thrifts, or
Wall Street investment banks. 122 By securitizing and selling its loans, IndyMac could shift the risk of
borrower defaults onto others. This business model led to significant deterioration in its credit and loan
underwriting standards. Accordingly, , when housing prices declined and the secondary market collapsed
IndyMac was left with a large number of nonperforming mortgages in its portfolio which was the primary
cause of its failure. 123
Later in July 2008, regulators and lawmakers made several moves to stabilize government-sponsored
entities Fannie Mae and Freddie Mac; the Federal Reserve authorized emergency lending by the Federal
Reserve Bank of New York (FRBNY) and; the Securities and Exchange Commission temporarily
prohibited naked short-selling in securities; President Bush signed into law the Housing and Economic
Recovery Act of 2008 which allowed the Treasury Department to purchase GSE obligations and created a
new regulatory regime for the entities – the Federal Housing Finance Agency (FHFA). Ultimately, on
September 7, FHFA placed both Fannie Mae and Freddie Mac into government conservatorship. 124
September 15, 2008 saw two more icons of Wall Street collapse and ushered in a period of extraordinary
government intervention to prevent a complete financial meltdown, the depths of which, according to
Federal Reserve Board Chairman Ben Bernanke, ―could have rivaled or surpassed the Great
119 Federal Reserve Bank of St. Louis, ―The Financial Crisis – A Timeline of Events and Policy Actions‖
120 Ibid
121 In an ―originate-to-distribute‖ model, for the most part, the originator of mortgages sells the mortgages to a person who
packages the loans into securities and sells the securities to investors. By selling the mortgages, the originator thus gets more
funds to make more loans. However, the ability to sell the mortgages without retaining any risk, also frees up the originator to
make risky loans, even those without regard to the borrower‘s ability to repay. In the years leading up to the crisis, the
originator was not penalized for failing to ensure that the borrower was actually qualified for the loan, and the buyer of the
securitized debt had little detailed information about the underlying quality of the loans.
122 Material Loss Review of IndyMac Bank, FSB (OIG-09-032); Office of Inspector General, U.S. Department of Treasury.
123 ―The primary causes of IndyMac‘s failure were largely associated with its business strategy of originating and securitizing
Alt-A loans on a large scale. This strategy resulted in rapid growth and a high concentration of risky assets.‖ Id.
―.IndyMac‘s aggressive growth strategy, use of Alt-A and other nontraditional loan products, insufficient underwriting, credit
concentrations in residential real estate in the California and Floridamarkets, and heavy reliance on costly funds borrowed from
the Federal Home Loan Bank (FHLB) and from brokered deposits, led to its demise when the mortgage market declined in
2007. IndyMac often made loans without verification of the borrower‘s income or assets, and to borrowers with poor credit
histories. Appraisals obtained by IndyMac on underlying collateral were often questionable as well. As an Alt-A lender,
IndyMac‘s business model was to offer loan products to fit the borrower‘s needs, using an extensive array of risky optionadjustable-rate-mortgages
(option ARMs), subprime loans, 80/20 loans, and other nontraditional products. Ultimately, loans
were made to many borrowers who simply could not afford to make their payments.‖ Id.
124 Federal Reserve Bank of St. Louis, ―The Financial Crisis – A Timeline of Events and Policy Actions‖
34

Depression.‖ 125 Bank of America announced its plan to purchase Merrill Lynch, and Lehman Brothers
filed for bankruptcy, unable to find a buyer. The following day, the Federal Reserve authorized the
FRBNY to provide the American International Group with up to $85 billion of emergency lending (the
FRBNY was authorized to lend an additional $37.8 billion to AIG on October 6 and later the Treasury
Department would purchase $40 billion of AIG preferred shares through the TARP program). On
September 17, the SEC announced a ban on short-selling of all stocks of financial sector companies. On
September 21, the Federal Reserve accepted applications from investment banking companies Goldman
Sachs and Morgan Stanley to become bank holding companies, allowing them access to the federal safety
net. From September 12 to October 10, the Dow Jones Industrial Average dropped 26%. Major bank
failures continued, with the OTS closing Washington Mutual on September 25, and facilitating its
acquisition by JPMorgan Chase. Wachovia bank also faced collapse, forcing it to find a buyer; ultimately
Wells Fargo purchased the bank on October 12. 126
While Wall Street was reeling, lawmakers worked to craft an emergency measure to stabilize the markets
and halt the momentum of the crisis. On September 20, Treasury Secretary Henry Paulson delivered to
Capitol Hill his proposal for the Emergency Economic Stabilization Act. Nine days later, the House of
Representatives voted down a modified version of the Treasury Department proposal. On that day, the
Dow Jones Industrial Average fell by more than 750 points. 127 The Senate later acted to pass a further
modified measure including comprehensive oversight, help for homeowners, and corporate governance
requirements not included in the Treasury Department proposal. The bill was signed into law by
President Bush on October 3, 2008, establishing the $700 billion Troubled Asset Relief Program (TARP).
As a result of the crisis, in addition to the losses of homes, family savings, and jobs, the government
became a reluctant, but major shareholder of private banks, automobile companies, and other giants of the
economy. The TARP program was enacted to provide the government with a critical tool needed to wrest
the economy from a free-fall. But with the passage of TARP, the Congress granted the Treasury
Department extraordinary powers and a staggering sum of taxpayer money to address a crisis that was
brought on by the failures of the very banks that benefited from the program and by the government
regulators that failed at their jobs. While this extent of government intervention was necessary to avert a
complete collapse of the U.S. economy, our nation should never again be put in the position of having to
bail out big companies.
The consequences of the crisis could not be more evident, from the failures on Wall Street to the
devastation on Main Street and across the globe. Its myriad causes however, are buried in a patchwork of
problems touching on almost every aspect of the financial services sector. Throughout the course of its
work over the past 40 months, the Committee probed and evaluated the causes of the economic downfall
in order to develop a legislative response that prevents a recurrence of the same problems and that creates
a new regulatory framework that can respond to the challenges of a 21 st century marketplace.
Causes of the Financial Crisis
The crisis was first triggered by the downturn in the national housing market, leading to an overall
housing slump. This slump brought into focus the prevalence of unsound lending practices, including
predatory lending tactics, most often in the subprime market. Many of these practices, and the products
that ultimately spread the risks associated with these practices, existed in what came to be known as the
125 Speech to the 43rd Annual Alexander Hamilton Awards Dinner, Center for the Study of the Presidency and Congress,
Washington, D.C., 4/8/10
126 Federal Reserve Bank of St. Louis, ―The Financial Crisis – A Timeline of Events and Policy Actions‖
127 Dow Jones Indexes, Index Data, www.djaverages.com
35

shadow banking system, a structure that eluded regulation and oversight despite its prevalence in the
financial marketplace.
Though the market for subprime mortgages was less than 1% of global financial assets, the faults in the
system allowed the turmoil in the housing market to spill over into other sectors. Faults in the system
included a securitization process that fueled excessive risk taking by permitting mortgage originators to
quickly sell the unsuitable loans they made, and thereby transfer the risks to someone else; credit rating
agencies that gave inflated ratings to securities backed by risky mortgage loans; and the use of
unregulated derivatives products based on these faulty loans that only served to spread and magnify the
risk. The system operated on a wholesale misunderstanding of, or complete disregard for the risks
inherent in the underlying assets and the complex instruments they were backing. Explaining the rise in
complex financial products and their danger to the financial system, Eugene Ludwig testified to the
Committee, ―Technology, plus globalization, plus finance has created something quite new, often called
‗financial technology.‘ Its emergence is a bit like the discovery of fire—productive and transforming
when used with care, but enormously destructive when mishandled.‖ 128
Gaps in the regulatory structure allowed these risks and products to flourish outside the view of those
responsible for overseeing the financial system. Many major market participants, such as AIG, were not
subject to meaningful oversight by federal regulators. Additionally, no financial regulator was
responsible for assessing the impact the failure of a single firm might have on the state of the financial
system. Indeed, as the crisis grew more severe, the interconnected relationships among financial
companies increased the pressure on those already struggling to survive, which only served to accelerate
the downfall of some firms. For example, as AIG‘s position worsened, it was required to post more
collateral to its counterparties and to increase its capital holdings as required by regulators.
Fueling the loss of confidence in the system was the failure of regulators and market participants to fully
understand the extent of the obligations of these teetering firms, thus making an orderly shutdown of these
companies nearly impossible. When Lehman Brothers declared bankruptcy, the markets panicked and the
crisis escalated. With no other means to resolve large, complex and interconnected financial firms, the
government was left with few options other than to provide massive assistance to prop up failing
companies in an effort to prevent the crisis from spiraling into a great depression.
Despite initial efforts of the government, credit markets froze and the U.S problem spread across the
globe. The crisis on Wall Street soon spilled over onto Main Street, touching the lives of most Americans
and devastating many.
IV. HISTORY OF LEGISLATION
From the beginning of the 110 th Congress, the work of the Senate Committee on Banking, Housing and
Urban Affairs focused on the problems in the housing market that started with the spread of predatory
lending and culminated in the turmoil in the credit markets that led to the economic crisis of 2008 and
2009. This work led to the drafting and committee passage of the Restoring American Financial Stability
Act in March 2010.
The Committee‘s first official examination of the housing crisis began with a hearing in February 2007,
titled ―Preserving the American Dream: Predatory Lending Practices and Home Foreclosures‖ which
featured testimony from representatives of the mortgage industry, consumer advocates, and victims of
128 Testimony before the Senate Committee on Banking, Housing, and Urban Affairs, 10/16/08
36

predatory lending. The next month, the Committee followed up with a hearing to explore problems in the
mortgage market -- ―Mortgage Market Turmoil: Causes and Consequences.‖ The hearing featured
testimony from federal and state banking regulators as well as representatives from industry and
consumers.
As the crisis evolved and leading up to Committee passage of RAFSA, the Committee held nearly 80
hearings to both examine the causes of the housing and economic crisis and assess how best to stabilize
the nation‘s financial services industry and capital markets, while lessening the impact of the crisis on
Main Street Americans. In the immediate aftermath of the collapse of Bear Stearns, the Committee held 8
hearings on the ―Turmoil in the U.S. Credit Markets‖ and the foreclosure crisis. Upon the collapse of
Lehman Brothers, the Committee held another series of hearings on the economic turmoil, including on
the Bush Administration‘s proposed legislation that eventually became the ―Emergency Economic
Stabilization Act of 2008.‖ The Committee has held a series of oversight hearings on the implementation
of that Act since its passage as well as on other extraordinary measures the financial regulatory agencies
have taken, including the Federal Reserve, to stabilize the economy.
Beginning in February 2009, the Committee began its first of more than 50 hearings to assess the types of
reforms needed to protect the economy from another devastating financial crisis. The Committee held
comprehensive hearings on how to end the abuses and loopholes that led the country into the current
crisis. Hearings explored all specific elements of the financial reform legislation, as well as specific
regulatory failures that contributed to the crisis.
With an eye toward drafting comprehensive legislation, the Committee held hearings on prudential bank
supervision, systemic risk, ending taxpayer bailouts of companies perceived to be ―too big to fail‖,
consumer protection, derivatives regulation, investor protection, private investment pools, insurance
regulation and government-sponsored entities. Throughout its examinations, the Committee took
testimony from regulators, policy experts, industry representatives, and consumer advocates.
In looking at the consequences of the crisis, the Committee examined how the crisis affected sectors all
across the financial services industry and the Main Street economy. Areas covered, aside from the overall
state of the banking, housing and securities industries, included the impact on community banks and
credit unions, manufacturing, international aspects of regulation, consumers, and the effect on
homeownership.
To learn from the mistakes of the past, the Committee thoroughly examined factors that led to the crisis.
These hearings began with investigations into the problems associated with subprime and predatory
lending, and continued with hearings including the failure of AIG, investment fraud including the Bernard
Madoff and Allen Stanford cases, the actions of credit ratings agencies, failures of regulators, problems of
risk management oversight, and the role of securitization in the financial crisis.
In the spring of 2009, the Obama Administration released a set of its proposals for financial regulatory
reform. On June 18, 2009, the Committee held a hearing, ―The Administration‘s Proposal to Modernize
the Financial Regulatory System,‖ to examine the President‘s ideas for reforms, including testimony from
Treasury Secretary Timothy Geithner. This hearing was followed by two hearings on additional
proposals from the Administration in the start of 2010, titled ―Prohibiting Certain High-Risk Investment
Activities by Banks and Bank Holding Companies‖ and ―Implications of the ‗Volcker Rules‘ for
Financial Stability.‖ These hearings included testimony from Deputy Secretary Neal S. Wolin, and
Presidential Economic Recovery Advisory Board Chairman and former Federal Reserve Board Chairman
Paul Volcker.
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On November 10, 2009, Banking Committee Chairman Christopher Dodd introduced to his colleagues a
discussion draft of financial reform legislation, based on the Committee‘s extensive hearing record,
numerous briefings and meetings, as well as the Administration‘s proposal. Introducing the draft,
Chairman Dodd said:
―It is the job of this Congress to restore responsibility and accountability in our financial system to
give Americans confidence that there is a system in place that works for and protects them…The
financial crisis exposed a financial regulatory structure that was the product of historic accident,
created piece by piece over decades with little thought given to how it would function as a whole,
and unable to prevent threats to our economic security…I will not stand for attempts to protect a
broken status quo, particularly when those attempts are made by some of the same special interests
who caused this mess in the first place.‖
The Committee convened on November 19, 2009, to begin consideration of the Restoring American
Financial Stability Act of 2009. The Committee met only to receive opening statements from members.
Based on the opening statements, the Chairman decided to postpone further consideration of the
legislation, pending the outcome of various bipartisan working groups the Chairman assembled to
consider significant aspects of the legislation.
On March 16, 2010, following more than 80 hearings with testimony from hundreds of experts and
months of negotiations with both Republicans and Democrats on the Banking Committee, Chairman
Dodd unveiled the financial reform proposal that he would introduce to the Committee. One week later,
on March 22, the Committee met and passed the bill by a vote of 13 to 10, as amended with a single
manager‘s amendment. No additional amendments were offered.
V. SECTION BY SECTION
Title I – Financial Stability
Section 101. Short Title
The title may be cited as the ―Financial Stability Act of 2010.‖
Section 102. Definitions
This section defines various terms used in the title, including ―bank holding company,‖ ―member
agency,‖ ―nonbank financial company,‖ ―Office of Financial Research,‖ and ―significant nonbank
financial company.‖ ―Nonbank financial companies‖ are defined as companies substantially engaged in
activities that are financial in nature (as defined in section 4(k) of the Bank Holding Company Act of
1956), excluding bank holding companies and their subsidiaries. ―Nonbank financial companies
supervised by the Board of Governors‖ refer to those nonbank financial companies that the Financial
Stability Oversight Council (―Council‖) has determined shall be supervised by the Board of Governors of
the Federal Reserve System (―Board of Governors‖) under section 113 and subject to prudential standards
authorized under this title.
This section requires the Board of Governors to establish by rulemaking the criteria for
determining whether a company is substantially engaged in financial activities to qualify as a nonbank
financial company. It is intended that commercial companies, such as manufacturers, retailers, and
others, would not be considered to be nonbank financial companies generally, and this provision is
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intended to provide certainty by mandating the establishment of the criteria through the public notice and
comment process required for rulemaking.
This section provides that the Board of Governors will define the term ―significant bank holding
company‖ and ―significant nonbank financial company‖ through rulemaking. It is not intended that
securities or futures exchanges regulated by the SEC and the CFTC that act as administrators of
marketplaces be considered a ―significant nonbank financial company,‖ which term is used in this title
with respect to counterparty exposure, to the extent the exchanges do not act as a counterparty (and thus
do not create credit exposures).
This section also clarifies that with respect to foreign nonbank financial companies, references to
―company‖ and ―subsidiary‖ include only the United States activities and subsidiaries of such foreign
companies.
Subtitle A – Financial Stability Oversight Council
Section 111. Financial Stability Oversight Council Established
This section establishes the Council, consisting of the following voting members: (1) the
Secretary of the Treasury, who will serve as the Chairperson (―Chairperson‖) of the Council, (2) the
Chairman of the Board of Governors (―Board of Governors‖) of the Federal Reserve System, (3) the
Comptroller of the Currency, (4) the Director of the Bureau of Consumer Financial Protection, (5)
Director of the Federal Housing Finance Agency, (6) the Chairman of the Securities and Exchange
Commission, (7) the Chairperson of the Federal Deposit Insurance Corporation (―FDIC‖), (8) the
Chairperson of the Commodity Futures Trading Commission, and (9) an independent member (appointed
by the President, with the advice and consent of the Senate) having insurance expertise.
The Director of the Office of Financial Research (which is established under subtitle B) will serve
in an advisory capacity as a nonvoting member. The Council will meet at the call of the Chairperson or
majority of the members then serving, but not less frequently than quarterly. Any employee of the
Federal government may be detailed to the Council, and any department or agency of the United States
may provide the Council such support services the Council may determine advisable.
Section 112. Council Authority
This section enumerates the purposes of the Council, which include: (1) identifying risks to the
financial stability of the United States that could arise from the material financial distress or failure of
large, interconnected bank holding companies or nonbank financial companies; (2) promoting market
discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such
companies that the government will shield them from losses in the event of failure; and (3) responding to
emerging threats to the stability of the United States financial markets.
The duties of the Council include: (1) collecting information from member agencies and other
regulatory agencies, and, if necessary to assess risks to the United States financial system, directing the
Office of Financial Research to collect information from bank holding companies and nonbank financial
companies; (2) providing direction to, and requesting data and analyses from, the Office of Financial
Research to support the work of the Council; (3) monitoring the financial services marketplace to identify
threats to U.S. financial stability; (4) facilitating information sharing among the member agencies; (5)
recommending to member agencies general supervisory priorities and principles reflecting the outcome of
discussions among the member agencies; (6) identifying gaps in regulation that could pose risks to U.S.
financial stability; (7) requiring supervision by the Board of Governors for nonbank financial companies
that may pose risks to the financial stability of the U.S. in the event of their material financial distress or
39

failure; (8) making recommendations to the Board of Governors concerning the establishment of
heightened prudential standards for risk-based capital, leverage, liquidity, contingent capital, resolution
plans and credit exposure reports, concentration limits, enhanced public disclosures, and overall risk
management for nonbank financial companies and large, interconnected bank holding companies
supervised by the Board of Governors; (9) identifying systemically important financial market utilities
and payments, clearing, and settlement system activities and subjecting them to prudential standards
established by the Board of Governors; (10) making recommendations to primary financial regulatory
agencies to apply new or heightened standards and safeguards for financial activities or practices that
could create or increase risks of significant liquidity, credit, or other problems spreading among bank
holding companies, nonbank financial companies, and United States financial markets; (11) providing a
forum for discussion and analysis of emerging market developments and financial regulatory issues, and
for resolution of jurisdictional disputes among member agencies; and (12) reporting to and testifying
before Congress.
The section also authorizes the Council to request and receive data from the Office of Financial
Research and member agencies to carry out the provisions of this title. The Council, acting through the
Office of Financial Research, may also require the submission of reports from financial companies to help
assess whether a financial company, activity, or market poses a threat to U.S. financial stability. Before
requiring such reports, the Council, acting through the Office of Financial Research, shall coordinate with
the appropriate member agency or primary financial regulatory agency and shall rely, whenever possible,
on information already available from these agencies. In the case of a foreign nonbank financial company
or a foreign-based bank holding company, it is intended that the Council, acting through the Office of
Financial Research, consult to the extent appropriate with the applicable foreign regulator for the
company.
Section 113. Authority to Require Supervision and Regulation of Certain Nonbank Financial
Companies
This section authorizes the Council, by a vote of not fewer than 2/3 of members then serving,
including an affirmative vote by the Chairperson, to determine that a nonbank financial company will be
supervised by the Board of Governors and subject to heightened prudential standards, if the Council
determines that material financial distress at such company would pose a threat to the financial stability of
the United States. Each determination will be based on a consideration of enumerated factors by the
Council, including, among others: the degree of leverage (a typical mutual fund could be an example of a
nonbank financial company with a low degree of leverage); amount and nature of financial assets; amount
and types of liabilities (which could be different types of liabilities based on, for example, their maturity,
volatility, or stability), including degree of reliance on short-term funding; extent and type of off-balancesheet
exposures; extent to which assets are managed rather than owned and to which ownership of assets
under management is diffuse; the operation of, or ownership interest in, any clearing, settlement, or
payment business of the company; and any other risk-related factors that the Council deems appropriate.
Size alone should not be dispositive in the Council‘s determination; in its consideration of the enumerated
factors, the Council should also take into account other indicia of the overall risk posed to U.S. financial
stability, including the extent of the nonbank financial company‘s interconnections with other significant
financial companies and the complexity of the nonbank financial company. It is not intended that a
Council determination be based on the exchange functions of securities or futures exchanges regulated by
the SEC and the CFTC, to the extent that as part of these functions the exchanges act as administrators of
marketplaces and not as counterparties. Further, it is not intended that the activities of securities and
futures exchanges overseen by the SEC and the CFTC that consist of, or occur prior to, trade execution be
considered a ―clearing, settlement or payment business,‖ provided that such activities do not include
functioning as a counterparty.
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The Council will provide written notice to each nonbank financial company of its proposed
determination and the company would have the opportunity for a hearing before the Council to contest the
proposed determination. The Council will consult with the primary federal regulatory agency of each
nonbank financial company or subsidiary of the company before making any final determination. The
section provides for judicial review of the final determination of the Council. In case of a foreign
nonbank financial company, it is intended that the Council consult to the extent appropriate with the
applicable foreign regulator for the company.
Section 114. Registration of Nonbank Financial Companies Supervised by the Board of Governors
This section directs a nonbank financial company to register with the Board of Governors if a final
determination is made by the Council under section 113 that such company is to be supervised by the
Board of Governors.
Section 115. Enhanced Supervision and Prudential Standards for Nonbank Financial Companies
Supervised by the Board of Governors and Certain Bank Holding Companies
This section authorizes the Council to make recommendations to the Board of Governors
concerning the establishment and refinement of prudential standards and reporting and disclosure
requirements for nonbank financial companies supervised by the Board of Governors pursuant to a
determination under section 113 and large, interconnected bank holding companies. Such standards and
requirements must be more stringent than those applicable to other nonbank financial companies and bank
holding companies that do not present similar risks to the financial stability of the United States, and they
must increase in stringency as appropriate in relation to certain characteristics of the company, including
its size and complexity. . The Council may only recommend standards for bank holding companies with
total consolidated assets of $50 billion or more, and the Council may recommend an asset threshold
greater than $50 billion for the applicability of any particular standard. The prudential standards may
include risk-based capital requirements, leverage limits, liquidity requirements, a contingent capital
requirement, resolution plan and credit exposure report requirements, concentration limits, enhanced
public disclosures, and overall risk management requirements.
The section enumerates the factors that the Council shall consider in making its recommendation,
which include those factors considered in determining whether a nonbank financial company should be
subject to supervision and prudential standards by the Board of Governors under section 113, among them
the amounts and types of assets and liabilities, degree of leverage, and extent of off-balance sheet
exposures. In making its recommendation, it is intended that the Council take into account the nature of
the business of different types of nonbank financial companies as well as any existing regulatory regime
applicable to different types of nonbank financial companies; the Committee recognizes that not all
standards and requirements may be applicable universally. With respect to the contingent capital
requirement, the Council shall conduct a study of the feasibility, benefits, costs, and structure of such a
requirement and report to Congress not later than two years after the date of enactment of this Act.
Section 116. Reports
Under this section, the Council, acting through the Office of Financial Research, may require
reports from nonbank financial companies supervised by the Board of Governors pursuant to a section
113 determination and bank holding companies with total consolidated assets of $50 billion or more and
their subsidiaries, but must use existing reports to the fullest extent possible.
Section 117. Treatment of Certain Companies That Cease to be Bank Holding Companies
This section is intended to ensure that a bank holding company that could pose a risk to U.S.
financial stability if it experienced material financial distress would remain supervised by the Board of
Governors and subject to the prudential standards authorized under this title even if it sells or closes its
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ank. The section applies to any entity or a successor entity that (1) was a bank holding company having
total consolidated assets equal to or greater than $50 billion as of January 1, 2010, and (2) received
financial assistance under or participated in the Capital Purchase Program established under the Troubled
Asset Relief Program. If such entity ceases to be a bank holding company at any time after January 1,
2010, then the entity will be treated as a nonbank financial company supervised by the Board of
Governors as if the Council had made a determination under section 113. The entity may request a
hearing and appeal to the Council its treatment as a nonbank financial company supervised by the Board
of Governors.
Section 118. Council Funding
Any expenses of the Council will be treated as expenses of, and paid by, the Office of Financial
Research. (The Council will have only one member for which it incurs salary and benefit expenses, the
independent member having insurance expertise. All other members of the Council, and any employees
detailed to the Council, will be paid by their respective agencies or departments.)
Section 119. Resolution of Supervisory Jurisdictional Disputes Among Member Agencies
This section authorizes a dispute resolution function for the Council. The Council shall resolve
disputes among member agencies about the respective jurisdiction over a particular financial company,
activity, or product if the agencies cannot resolve the dispute without the Council‘s intervention. The
section prescribes the procedures for dispute resolution and makes the Council‘s written decision binding
on the member agencies that are parties to the dispute.
Section 120. Additional Standards Applicable to Activities or Practices for Financial Stability
Purposes
This section authorizes the Council to issue recommendations to the primary financial regulatory
agencies to apply new or heightened prudential standards and safeguards, including those enumerated in
section 115, for a financial activity or practice conducted by bank holding companies or nonbank financial
companies under the agencies‘ jurisdiction. The Council would make such recommendation if it
determines that the conduct of the activity or practice could create or increase the risk of significant
liquidity, credit, or other problems spreading among bank holding companies and nonbank financial
companies or U.S. financial markets. The section requires the Council to consult with the primary
financial regulatory agencies, provide notice and opportunity for comment on any proposed
recommendations, and consider the effect of any recommendation on costs to long-term economic
growth. The Council may recommend specific actions to apply to the conduct of a financial activity or
practice, including limits on scope or additional capital and risk management requirements.
The Council may inform the primary financial regulatory agency of any Council determination
that a bank holding company or nonbank financial company, activity, or practice no longer requires any
heightened standards implemented under this title. The primary financial regulatory agency may
determine whether to keep such standards in effect, and shall promulgate regulations to establish a
procedure by which entities under its jurisdiction may appeal the determination of the primary financial
regulatory agency.
Section 121. Mitigation of Risks to Financial Stability
This section is intended to provide additional authority for regulators to address grave threats to
U.S. financial stability if the prudential standards established under this title would not otherwise do so.
The section authorizes the Board of Governors, if it determines that a nonbank financial company
supervised by the Board of Governors pursuant to a determination under section 113 or a bank holding
company with total consolidated assets of $50 billion or more poses a grave threat to the financial stability
of the United States, to require such company to comply with conditions on the conduct of certain
42

activities, terminate certain activities, or, if the Board of Governors determines that such action is
inadequate to mitigate a threat to the financial stability of the United States, sell or transfer assets to
unaffiliated entities, with an affirmative vote of 2/3 of the Council members then serving and after notice
and opportunity for hearing. The Board of Governors and the Council will take into consideration the
factors set forth in section 113(a) and (b) in any determination or decision under this section.
Section 151. Definitions
Subtitle B – Office of Financial Research
Section 152. Office of Financial Research Established
This section establishes within the Treasury Department the Office of Financial Research,
(―Office‖) headed by a Director appointed by the President and confirmed by the Senate. The Director
shall serve for a term of 6 years. This section provides the Director with certain authorities to manage the
Office and also authorizes a fellowship program to be established.
Section 153. Purpose and Duties of the Office
The purpose of the Office is to support the Council in fulfilling the purposes and duties of the
Council and to support member agencies of the Council by (1) collecting data on behalf of the Council
and providing such data to the Council and member agencies; (2) standardizing the types and formats of
data reported and collected; (3) performing applied research and essential long-term research; (4)
developing tools for risk measurement and monitoring; (5) performing other related services; (6) making
the results of the activities of the Office available to financial regulatory agencies, and (7) assisting
member agencies in determining the types and formats of data where member agencies are authorized by
this Act to collect data . This section provides the Office with certain administrative authorities and
rulemaking authority regarding data collection and standardization, requires the Director to testify
annually before Congress, and authorizes the Director to provide additional reports to Congress.
Testimony provided by the Director is not subject to review or approval by any other Federal agency or
officer.
Section 154. Organizational Structure; Responsibilities of Primary Programmatic Units
This section establishes within the Office, to carry out the programmatic responsibilities of the
Office, the Data Center and the Research and Analysis Center. The Data Center shall, on behalf of the
Council, collect, validate, and maintain all data necessary to carry out the duties of the Data Center. The
data assembled shall be obtained from member agencies of the Council, commercial data providers,
publicly available data sources, and financial entities. The Data Center shall prepare and publish a
financial company reference database, financial instrument reference database, and formats and standards
for Office data, but shall not publish any confidential data. The Research and Analysis Center shall, on
behalf of the Council, develop and maintain independent analytical capabilities and computing resources
to (1) develop and maintain metrics and reporting systems for risks to the financial stability of the United
States, (2) monitor investigate, and report on changes in system-wide risk levels and patterns to the
Council and Congress, (3) conduct, coordinate, and sponsor research to support and improve regulation of
financial entities and markets, (4) evaluate and report on stress tests or other stability-related evaluations
of financial entities overseen by the member agencies, (5) maintain expertise in such areas as may be
necessary to support specific requests for advice and assistance from financial regulators, (6) investigate
disruptions and failures in the financial markets, report findings, and make recommendations to the
Council based on those findings, (7) conduct studies and provide advice on the impact of policies related
to systemic risk, and (8) promote best practices for financial risk management. Not later than 2 years after
the date of enactment of this Act, and not later than 120 days after the end of each fiscal year thereafter,
the Office shall submit a report to Congress that assesses the state of the United States financial system,
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including an analysis of any threats to the financial stability of the United States, the status of the efforts
of the Office in meeting the mission of the Office, and key findings from the research and analysis of the
financial system by the Office.
Section 155. Funding
This section provides authority to fund the Office through assessments on nonbank financial
companies supervised by the Board of Governors pursuant to a determination under section 113 and bank
holding companies with total consolidated assets of $50 billion or more. The Board of Governors shall
provide interim funding during the 2-year period following the date of enactment of this Act, and
subsequent to the 2-year period the Secretary of Treasury shall establish by regulation, with the approval
of the Council, an assessment schedule applicable to such companies that takes into account differences
among such companies based on considerations for establishing the prudential standards for such
companies under section 115.
Section 156. Transition Oversight
The purpose of this section is to ensure that the Office has an orderly and organized startup,
attracts and retains a qualified workforce, and establishes comprehensive employee training and benefits
programs. The Office shall submit an annual report to the Senate Banking Committee and the House
Financial Services Committee that includes a training and workforce development plan, workplace
flexibilities plan, and recruitment and retention plan. The reporting requirement shall terminate 5 years
after the date of enactment of the Act. Nothing in this section shall be construed to affect a collective
bargaining agreement or the rights of employees under chapter 71 of title 5, United States Code.
Subtitle C – Additional Board of Governors Authority for Certain Nonbank Financial Companies
and Bank Holding Companies
Section 161. Reports by and Examination of Nonbank Financial Companies by the Board of
Governors
The Board of Governors may require reports from nonbank financial companies supervised by the
Board of Governors pursuant to a determination under section 113 and any subsidiaries of such
companies, and may examine them to determine the nature of the operations and financial condition of the
company and its subsidiaries; the financial, operational, and other risks within the company that may pose
a threat to the safety and soundness of the company or the stability of the U.S. financial system; the
systems for monitoring and controlling such risks; and compliance with the requirements of this subtitle.
To the fullest extent possible, the Board of Governors shall rely on reports and information that
such companies and their subsidiaries have provided to other Federal and State regulatory agencies, and
on reports of examination of functionally regulated subsidiaries made by their primary regulators (or in
case of foreign nonbank financial companies, reports provided to home country supervisor to the extent
appropriate).
Section 162. Enforcement
Nonbank financial companies supervised by the Board of Governors will be subject to the
enforcement provisions under section 8 of the Federal Deposit Insurance Act.
If the Board of Governors determines that a depository institution or functionally regulated
subsidiary does not comply with the regulations of the Board of Governors or otherwise poses a threat to
the financial stability of the U.S., the Board of Governors may recommend in writing to the primary
financial regulatory agency for the subsidiary that the agency initiate a supervisory action or an
44

enforcement proceeding. If the agency does not initiate an action within 60 days, the Board of Governors
may take the recommended supervisory or enforcement action.
Section 163. Acquisitions
A nonbank financial company supervised by the Board of Governors pursuant to a determination
under section 113 shall be treated as a bank holding company for purposes of section 3 of the Bank
Holding Company Act which governs bank acquisitions. A nonbank financial company supervised by the
Board of Governors or a bank holding company with total consolidated assets of $50 billion or more shall
not acquire direct or indirect ownership or control of any voting shares of a company engaged in
nonbanking activities having total consolidated assets of $10 billion or more without providing advanced
written notice to the Board of Governors.
In addition to other criteria under the Bank Holding Company Act for reviewing acquisitions, the
Board of Governors shall consider the extent to which a proposed acquisition would result in greater or
more concentrated risks to global or U.S. financial stability of the global or U.S. economy.
Section 164. Prohibition Against Management Interlocks Between Certain Financial Holding
Companies
A nonbank financial company supervised by the Board of Governors pursuant to a determination
under section 113 shall be treated as a bank holding company for purposes of the Depository Institutions
Management Interlocks Act. It is not intended that a registered investment company sponsored by a
nonbank financial company be deemed unaffiliated with its sponsor for the purpose of this section.
Section 165. Enhanced Supervision and Prudential Standards for Nonbank Financial Companies
Supervised by the Board of Governors and Certain Bank Holding Companies
This section directs the Board of Governors to establish prudential standards and reporting and
disclosure requirements for nonbank financial companies supervised by the Board of Governors pursuant
to a determination under section 113 and large, interconnected bank holding companies with total
consolidated assets of $50 billion or more. The standards and requirements shall be more stringent than
those applicable to other nonbank financial companies and bank holding companies that do not present
similar risks to the financial stability of the United States, and increase in stringency as appropriate in
relation to certain characteristics of the company, including its size and complexity. The Board of
Governors may adopt an asset threshold greater than $50 billion for the applicability of any particular
standard. The prudential standards will include risk-based capital requirements, leverage limits, liquidity
requirements, a contingent capital requirement, resolution plan and credit exposure report requirements,
concentration limits, enhanced public disclosures, and overall risk management requirements. The
section enumerates the factors that the Board of Governors shall consider in setting the standards, which
include those factors considered in determining whether a nonbank financial company should be subject
to supervision and prudential standards by the Board of Governors under section 113, among them the
amounts and types of assets and liabilities, degree of leverage, and extent of off-balance sheet exposures.
It requires that each nonbank financial company supervised by the Board of Governors as well as bank
holding company with total consolidated assets of $10 billion or more that is a publicly traded company to
establish a risk committee to be responsible for oversight of enterprise-wide risk management practices of
the company.
With respect to the resolution plan requirement authorized in this section, if the Board of
Governors and the FDIC jointly determine that the resolution plan of a company is not credible and would
not facilitate an orderly resolution under the bankruptcy code, such company would have to resubmit
resolution plans to correct deficiencies. Failure to resubmit a plan correcting deficiencies within a certain
timeframe would result in the imposition of more stringent capital, leverage, or liquidity requirements, or
45

estrictions on the growth, activities, or operations of the company. If, two years after the imposition of
these requirements or restrictions, the company still has not resubmitted a plan that corrects the
deficiencies, the Board of Governors and the FDIC, in consultation with the Council, may direct the
company to divest certain assets or operations in order to facilitate an orderly resolution under the
bankruptcy code in the event of failure.
Section 166. Early Remediation Requirements
The Board of Governors, in consultation with the Council and the FDIC, shall by regulation
establish requirements to provide for early remediation of financial distress of a nonbank financial
company supervised by the Board of Governors pursuant to a determination under section 113 or a large,
interconnected bank holding company with total consolidated assets of $50 billion or more. This
provision does not authorize the provision of any financial assistance from the Federal government.
Instead, the purpose of this provision is to establish a series of specific remedial actions to be taken by
such company if it is experiencing financial distress, in order to minimize the probability that the
company will become insolvent and the potential harm of such insolvency to the financial stability of the
United States. It is intended that the requirements established under this section take into account the
structure and operations of, and any existing regulatory regime applicable to, different types of nonbank
financial companies, including whether certain structures impose legal or structural limits on the ability of
the nonbank financial company to hold capital.
Section 167. Affiliation
Nothing in this subtitle shall be construed to require a nonbank financial company supervised by
the Board of Governors pursuant to a determination under section 113 or a company that controls such
nonbank financial company to conform it activities to the requirements of section 4 of the Bank Holding
Company Act. If such company engages in activities that are not financial in nature, the Board of
Governors may require such company to establish and conduct its financial activities in an intermediate
holding company.
Section 168. Regulations
Except as otherwise specified in this subtitle, the Board of Governors shall issue final regulations
to implement this subtitle no later than 18 months after the transfer date.
Section 169. Avoiding Duplication
The Board of Governors shall take any action it deems appropriate to avoid imposing
requirements that are duplicative of applicable requirements under other provisions of law.
Section 170. Safe Harbor
The Board of Governors shall promulgate regulations on behalf of, and in consultation with, the
Council setting forth the criteria for exempting certain types or classes of nonbank financial companies
from supervision by the Board of Governors pursuant to a determination under section 113. It is intended
that such regulations take into account potential duplication between the requirements under this title and
Title VIII of this Act for financial market utilities. The Board of Governors, in consultation with the
Council, shall review such regulations no less frequently than every 5 years, and based upon the review,
the Board of Governors may update such regulations, and such updates will not take effect until 2 years
after publication in final form. The Chairpersons of the Board of Governors and the Council shall submit
a joint report to the Senate Banking Committee and the House Financial Services Committee not later
than 30 days after issuing the regulations or updates, and such report shall include at a minimum the
rationale for exemption and empirical evidence to support the criteria for exemption.
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Title II – Orderly Liquidation Authority
Section 201. Definitions
This section defines various terms used in this title. Financial companies are defined as (1) bank
holding companies, (2) nonbank financial companies supervised by the Board of Governors of the Federal
Reserve System (Board of Governors) pursuant to a determination under section 113 of this Act, (3) other
companies predominantly engaged in activities that the Board of Governors has determined are financial
in nature, or incidental to activities that are financial in nature, for purposes of section 4(k) of the Bank
Holding Company Act of 1956, and (4) subsidiaries of any of the companies included in (1), (2), and (3)
other than an insured depository institution or insurance company (but it is not intended that an
investment company required to be registered under the Investment Company Act of 1940 would be
deemed to be a subsidiary of a company included in (1) (2), and (3) by reason of the provision by such
company of services to the investment company, unless such company (including through all of its
affiliates) owns 25 percent or more of the shares of the investment company). An ―insurance company‖ is
any entity that is engaged in the business of insurance, subject to regulation by a State insurance regulator,
and covered by a State law that is designed to specifically deal with the rehabilitation, liquidation, or
insolvency of an insurance company. A mutual insurance holding company organized and operating
under State insurance laws may be considered an insurance company for the purpose of this title. A
―covered financial company‖ is a financial company for which a determination has been made to use the
orderly liquidation authority under section 203.A ―covered broker or dealer‖ is a covered financial
company that is a broker dealer registered with the Securities and Exchange Commission (―SEC‖) under
section 15(b) of the Securities Exchange Act of 1934 and is a member of Securities Investor Protection
Corporation (―SIPC‖).
Section 202. Orderly Liquidation Authority Panel
This section establishes an Orderly Liquidation Authority Panel (―Panel‖) composed of 3 judges
from the United States Bankruptcy Court for the District of Delaware. Subsequent to a determination by
the Secretary of the Treasury (―Secretary‖) under section 203, the Secretary, upon notice to the Federal
Deposit Insurance Corporation (―FDIC‖) and the covered financial company, shall petition the Panel for
an order authorizing the Secretary to appoint the FDIC as receiver. The Panel, after notice to the covered
financial company and a hearing in which the covered financial company may oppose the petition, shall
determine within 24 hours of receipt of the petition whether the determination of the Secretary is
supported by substantial evidence. If the Panel determines that the determination of the Secretary (1) is
supported by substantial evidence, the Panel shall issue an order immediately authorizing the Secretary to
appoint the Corporation as receiver of the covered financial company, and (2) is not supported by
substantial evidence, the Panel shall immediately provide the Secretary with a written statement of its
reasons and afford the Secretary with an opportunity to amend and refile the petition with the Panel. The
decision of the Panel may be appealed to the United States Court of Appeals not later than 30 days after
the date on which the decision of the Panel is rendered, and the decision of the Court of Appeals may be
appealed to the Supreme Court not later than 30 days after the date of the final decision of the Court of
Appeals.
This section also requires the following studies: a study each by the Administrative Office of the
United States Courts and the Comptroller General of the United States regarding the bankruptcy and
orderly liquidation process for financial companies under the Bankruptcy Code, and a study by the
Comptroller General of the United States regarding international coordination relating to the orderly
liquidation of financial companies under the Bankruptcy Code.
Section 203. Systemic Risk Determination
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This section establishes the process for triggering the use of the orderly liquidation authority. The
process includes several steps intended to make the use of this authority very rare. There is a strong
presumption that the Bankruptcy Code will continue to apply to most failing financial companies (other
than insured depository institutions and insurance companies which have their own separate resolution
processes), including large financial companies.
To trigger the orderly liquidation authority, the Board of Governors and the Board of Directors of
the FDIC must each, by a two-thirds vote of its members then serving, provide a written recommendation
to the Secretary that includes: (1) an evaluation of whether a financial company is in default or in danger
of default; (2) a description of the effects that the failure of the financial company would have on financial
stability in the United States; and (3) a recommendation regarding the nature and extent of actions that
should be taken under this title. (The Secretary may request the Board of Governors and the FDIC to
consider making the recommendation, or the Board of Governors and the FDIC may make the
recommendation on their own initiative.)
In the case of a covered broker or dealer, or in which the largest U.S. subsidiary of a covered
financial company is a covered broker or dealer, the SEC and the Board of Governors must each, by a
two-thirds vote of its members then serving, provide a written recommendation to the Secretary as
described above. (The Secretary of the Treasury may request the Board of Governors and the SEC to
consider making the recommendation, or the Board of Governors and the SEC may make the
recommendation on their own initiative.)
Upon receiving such recommendations, the Secretary (in consultation with the President) may
make a written determination that: (1) the financial company is in default or in danger of default; (2) the
failure of the financial company and its resolution under otherwise applicable law would have serious
adverse effects on U.S. financial stability; (3) no viable private sector alternative is available to prevent
default; (4) any effect on the claims or interests of creditors, counterparties, and shareholders as a result of
actions taken under this title has been taken into account; (5) any action under section 204 would avoid or
mitigate such adverse effects; and (6) a Federal regulatory agency has ordered the financial company to
convert all of its convertible debt instruments that are subject to the regulatory order. The Secretary
would take into consideration the effectiveness of the action in mitigating adverse effects on the financial
system, any cost to the Treasury, and the potential to increase excessive risk taking on the part of
creditors, counterparties, and shareholders in the covered financial company.
The Secretary shall provide written notice of the determination to Congress within 24 hours. The
FDIC shall submit a report to Congress within 60 days of its appointment as receiver on the covered
financial company and update the information contained in the report at least quarterly. The Government
Accountability Office will review and report on the Secretary‗s determination.
The FDIC shall establish policies and procedures acceptable to the Secretary governing the use of
funds available to the FDIC to carry out this title.
If an insurance company that is a covered financial company or subsidiary or affiliate of a covered
financial company, its liquidation or rehabilitation shall be conducted as provided under state law. The
FDIC shall have backup authority to file appropriate judicial action in state court to place such a company
into liquidation under state law if the state regulator fails to act within 60 days.
Section 204. Orderly Liquidation
This section provides a strong presumption that, in the exercise of orderly liquidation authority:
(1) creditors and shareholders will bear losses, (2) management responsible for the company‘s financial
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condition are not retained, and (3) the FDIC and other agencies (where applicable) take steps to ensure
that management and other parties responsible for the failed company‘s financial condition bear losses
through actions for damages, restitution, and compensation clawbacks. The section provides that the
FDIC act as receiver of the covered financial company upon appointment of the Corporation under
section 202. The FDIC, as receiver, must consult with primary financial regulatory agencies of: (1) the
covered financial company and its covered subsidiaries to ensure an orderly liquidation; and (2) any
subsidiaries that are not covered subsidiaries to coordinate the appropriate treatment of any such solvent
subsidiaries and the separate resolution of any such insolvent subsidiaries under other governmental
authority, as appropriate. The FDIC shall consult with the SEC and the SIPC in the case of a covered
financial company that is a broker dealer and member of SIPC. The FDIC may consult with or acquire
the services of outside experts to assist in the orderly liquidation process.
The FDIC may make funds available to the receivership for the orderly liquidation of the covered
financial company subject to the mandatory terms and conditions set forth in section 206 and the orderly
liquidation plan described in section 210(n)(14).
Section 205. Orderly Liquidation of Covered Brokers and Dealers
This section authorizes the application of orderly liquidation authority, if necessary, to a SIPCmember
broker or dealer while generally preserving SIPC‘s powers and duties under the Securities
Investor Protection Act of 1970 (―SIPA‖) with respect to the liquidation of such entity. The section
provides that the FDIC shall appoint SIPC, without any need for court approval, to act as trustee for
liquidation under the SIPA of a covered broker or dealer. The subsection prescribes the powers, duties,
and limitation of powers of SIPC as trustee. Except as otherwise provide in this title, no court may take
any action, including an action pursuant to the SIPA or the Bankruptcy Code, to restrain or affect the
powers or functions of the FDIC as receiver of the covered broker or dealer.
Section 206. Mandatory Terms and Conditions for All Orderly Liquidation Actions.
The FDIC shall take action under this title only if it determines that such actions are necessary for
financial stability and not for the purpose of preserving the covered financial company. The FDIC must
also ensure that shareholders would not receive any payment until after all other claims are fully paid, that
unsecured creditors bear losses in accordance with the claims priority provisions in section 210, and that
management responsible for the company‘s failure is removed (if it has not already been removed at the
time of the FDIC‘s appointment as receiver).
Section 207. Directors not Liable for Acquiescing in Appointment of Receiver
This section exempts the board of directors of a covered financial company from liability to the
company‘s shareholders or creditors for acquiescing or consenting in good faith to appointment of a
receiver under section 202.
Section 208. Dismissal and Exclusion of Other Actions
This section provides that the appointment of the FDIC as receiver under section 202 for a covered
financial company or the appointment of SIPC as trustee for a covered broker or dealer under section 205
shall result in the dismissal of any existing bankruptcy or insolvency case or proceeding and prevent the
commencement of any such case or proceeding while the orderly liquidation is pending.
Section 209. Rulemaking; Non-Conflicting Law
This section requires the FDIC, in consultation with the Council, to prescribe such rules or
regulations as considered necessary or appropriate to implement this title. To the extent possible, the
FDIC shall seek to harmonize applicable rules and regulations promulgated under this section with the
insolvency laws that would otherwise apply to a covered financial company.
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Section 210. Powers and Duties of the Corporation
Subsection (a). Powers and Authorities.
This subsection defines the powers and authorities of the FDIC as receiver of a covered financial
company, including its powers and duties: (1) to succeed to the rights, title, powers, and privileges of the
covered financial company and its stockholders, members, officers, and directors; (2) to operate the
company with all the powers of shareholders, members, directors, and officers; (3) to liquidate the
company through sale of assets or transfer of assets to a bridge financial company established under
subsection (h); (4) to merge the company with another company or transferring assets or liabilities; (5) to
pay valid obligations that come due, to the extent that funds are available; (6) to exercise subpoena
powers; (7) to utilize private sector services to manage and dispose of assets; (8) to terminate rights and
claims of stockholders and creditors (except for the right to payment of claims consistent with the priority
of claims provision under this section); and (9) to determine and pay claims. The subsection also
prescribes the FDIC‘s authorities to avoid fraudulent or preferential transfers of interests of the covered
financial company.
Subsection (b). Priority of Expenses and Unsecured Claims.
This section defines the priority of expenses and unsecured claims against the covered financial
company or the FDIC as receiver for such company. All claimants of a covered financial company that
are similarly situated in the expenses and claims priority shall be treated in a similar manner except in
cases where the FDIC determines that doing otherwise would maximize the value of the company‘s assets
or maximize the present value of the proceeds (or minimize the amount of any loss) from disposing of the
assets of the company. Creditors who receive more than they would otherwise receive if all similarly
situated creditors were treated in a similar manner would be subject to a substantially higher assessment
rate under subsection (o)(1)(E)(ii). All claimants that are similarly situated in the expenses and claims
priority shall not receive less than the maximum liability amount defined in subsection (d). The section
also defines the priority of expenses and unsecured claims in those cases where the FDIC is appointed
receiver for a covered broker or dealer.
Subsection (c). Provisions Relating to Contracts Entered Into Before Appointment of Receiver.
This subsection authorizes the FDIC to repudiate and enforce contracts and handle the financial
company‘s qualified financial contracts (including derivatives). A counterparty to a qualified financial
contract would be stayed from terminating, liquidating, or netting the contract (solely by reason of the
appointment of a receiver) until 5:00 PM on the fifth business day after the date that the FDIC was
appointed receiver. (The length of the stay differs from that authorized under the Federal Deposit
Insurance Act with respect to an insured depository institution. Under the Federal Deposit Insurance Act,
the stay would last until 5:00 PM one business day following the date that the FDIC was appointed
receiver.)
Subsection (d). Valuation of Claims in Default.
This subsection establishes the FDIC‘s maximum liability for claims against the covered financial
company (or FDIC as receiver) as the amount that the claimant would have received if the FDIC had not
been appointed receiver with respect to the covered financial company and the company was liquidated
under chapter 7 of the U.S. Bankruptcy Code or any State insolvency law. The subsection also
authorizes the FDIC, as receiver and with the Secretary‘s approval, to make additional payments to
claimants only if the FDIC determines this to be necessary to minimize losses to the FDIC as receiver
from the orderly liquidation of the covered financial company. Creditors who receive such additional
payments would be subject to a substantially higher assessment rate under subsection (o)(1)(E)(ii).
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Subsection (e). Limitation on Court Action.
This subsection precludes a court from taking action to restrain or affect the powers or functions of
the FDIC when it is exercising its powers as receiver, except as otherwise provided in the title.
Subsection (f). Liability of Directors and Officers.
This subsection provides that FDIC may take actions to hold directors and officers of a covered
financial company personally liable for monetary damages with respect to gross negligence.
Subsection (g). Damages.
This subsection provides that recoverable damages in claims brought against directors, officers, or
employees of a covered financial company for improper investment or use of company assets include
principal losses and appropriate interest.
Subsection (h). Bridge Financial Companies.
This subsection authorizes the FDIC, as receiver, to establish one or more bridge financial
companies. Such bridge financial companies may assume liabilities and purchase assets of the covered
financial company, and perform other temporary functions that the FDIC may prescribe.
Subsection (i). Sharing Records.
This subsection requires other Federal regulators to make available to the FDIC all records relating
to the covered financial company.
Subsection (j). Expedited Procedures for Certain Claims.
This subsection expedites federal courts‘ consideration of cases brought by the FDIC against a
covered financial company‘s directors, officers, employees, or agents.
Subsection (k). Foreign Investigations.
This subsection authorizes the FDIC, as receiver, to request assistance from, and provide
assistance to, any foreign financial authority.
Subsection (l). Prohibition on Entering Secrecy Agreements and Protective Orders.
This subsection prohibits the FDIC from entering into any agreement that prohibits it from
disclosing the terms of any settlement of any action brought by the FDIC as receiver of a covered
financial company.
Subsection (m). Liquidation of Certain Covered Financial Companies or Bridge Financial Companies.
This subsection provides that the FDIC, as receiver, in liquidating any covered financial company
or bridge financial company that is either (1) a stockbroker that is not a member of SIPC, or (2) a
commodity broker, will apply the applicable liquidation provisions of the bankruptcy code pertaining to
―stockbrokers‖ and ―commodity brokers‖ (as such terms are defined in subchapters III and IV,
respectively, of chapter 7 of chapter 7 of the U.S. Bankruptcy Code).
Subsection (n). Orderly Liquidation Fund.
This subsection creates the Orderly Liquidation Fund (―Fund‘) in the Treasury Department that
will be available to the FDIC to carry out the authorities in this title. The sole purpose of the Fund is to
allow the FDIC to carry out the orderly liquidation of a covered financial company as authorized by this
title; the Fund may not be used for any other purpose. The FDIC shall manage the Fund consistent with
the policies and procedures acceptable to the Secretary of Treasury that are established under section
203(d), and invest amounts held in the Fund that are not required to meet the FDIC‘s current needs in
obligations of the United States.
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The target size of the Fund shall be $50 billion, adjusted on a periodic basis for inflation. The
FDIC shall impose assessments as provided in subsection (o) to capitalize the Fund and reach the target
size during an ―initial capitalization period‖ of not less than 5 years or greater than 10 years from the date
of enactment. (The FDIC, with the approval of the Secretary of the Treasury, may extend the initial
capitalization period if the Fund incurs a loss from the failure of a covered financial company before the
initial capitalization period expires.) Except as provided in subsection (o), FDIC shall suspend
assessments when the initial capitalization period expires. The intention of this subsection and subsection
(o) is to require large financial firms, rather than taxpayers, to serve as the first source of liquidity in
winding down the failed financial company.
The FDIC may issue obligations to the Secretary of the Treasury. FDIC may not issue or incur
any obligation that would result in total obligations outstanding that exceed the sum of (1) the amount of
cash and cash equivalents held in the Fund, and (2) the amount that is equal to 90 percent of the fair value
of assets from each covered financial company that are available to repay the FDIC (the ―maximum
obligation limitation‖). It is intended that the determination of the amount available to the FDIC under
(2) above be limited to what the assets of the covered financial company, calculated on a consolidated
basis, can support. The FDIC and the Secretary shall jointly prescribe rules, in consultation with the
Council, governing the calculation of the maximum obligation limitation.
The FDIC may issue obligations only after the cash and cash equivalents of the Fund have been
drawn down to facilitate the orderly liquidation of a covered financial company.
Amounts in the Fund shall be available to the FDIC with regard to a covered financial company
for which the FDIC has been appointed receiver after the FDIC has developed an orderly liquidation plan
acceptable to the Secretary of the Treasury. The FDIC may amend an approved plan at any time, with the
concurrence of the Secretary.
Subsection (o). Risk-Based Assessments.
This subsection requires the FDIC to charge risk-based assessments to eligible financial
companies during the initial capitalization period until the FDIC determines that the Fund has reached the
target size. Eligible financial companies include bank holding companies with total consolidated assets
equal to or greater than $50 billion and nonbank financial companies supervised by the Board of
Governors pursuant to a determination under section 113 of Title I.
The FDIC must charge additional risk-based assessments if: (1) the Fund falls below the target
size after the initial capitalization period in order to restore the Fund to the target size over a period
determined by the FDIC; (2) the FDIC is appointed receiver for a covered financial company and the
Fund incurs a loss during the initial capitalization period; or (3) such assessments are necessary to pay in
full obligations issued to the Secretary of the Treasury within 60 months of their issuance (unless the
FDIC requests, and the Secretary approves, an extension in order to avoid as serious adverse effect on the
U.S. financial system). If required, any such additional risk-based assessments shall be imposed on (1)
eligible financial companies and financial companies with total assets equal to or greater than $50 billion
that are not eligible financial companies, and (2) any financial company, at a substantially higher rate than
would otherwise be assessed, that benefitted from the orderly liquidation under this title by receiving
payments or credit pursuant to subsections (b)(4), (d)(4), and (h)(5). The subsection outlines the risk
factors that the FDIC shall consider in imposing risk-based assessments to capitalize the Fund as well as
any additional assessments that may be required.
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The FDIC shall prescribe regulations to carry out this subsection in consultation with the Secretary
and the Council, and such regulations shall take into account the differences in risks posed by different
financial companies, the differences in the liability structure of financial companies, and the different
bases for other assessments that such financial companies may be required to pay, to ensure that assessed
financial companies are treated equitably and that assessments under this subsection reflect such
differences. It is intended that the risk-based assessments may vary among different types or classes of
financial companies in accordance with the risks posed to the financial stability of the United States. For
instance, certain types of financial companies such as insurance companies and other financial companies
that may present lower risk to U.S. financial stability (as indicated, for example, by higher capital, lower
leverage, or similar measures of risk as appropriate depending on the nature of the business of the
financial companies) relative to other types of financial companies should be assessed at a lower rate.
Furthermore, the FDIC should consider the impact of potential assessment on the ability of certain taxexempt
entities to carry out their legally required charitable and educational missions, such as the ability
of not-for-profit fraternal benefit societies to carry out their state and federally required missions to serve
their members and communities.
Subsection (p). Unenforceability of Certain Agreements.
This subsection prohibits enforceability of any term contained in any existing or future standstill,
confidentiality, or other agreement that affects or restricts the ability of a person to acquire, that prohibits
a person from offering to acquire, or that prohibits a person from using previously disclosed information
in connection with an offer to acquire, all or part of a covered financial company.
Subsection (q). Other Exemptions.
This subsection provides certain exemptions to the FDIC from taxes and levies when acting as a
receiver for a covered financial company.
Subsection (r). Certain Sales of Assets Prohibited.
This subsection requires the FDIC to prescribe regulations prohibiting the sale of assets of a
covered financial company to certain persons found to have been engaged in fraudulent activity or
participated in transactions causing substantial losses to a covered financial company or who are
convicted debtors.
Section 211. Miscellaneous Provisions.
This section makes a conforming change relating to concealment of assets from the FDIC acting
as receiver for a covered financial company, and makes a conforming change to the netting provisions
contained in the Federal Deposit Insurance Corporation Improvement Act of 1991 by expanding the
exceptions to include section 210(c) of this Act and section 1367 of HERA (12 U.S.C. § 4617(d)).
Title III – Transfer of Powers to the Comptroller of the Currency, the Corporation,
and the Board of Governors
Section 301. Short Title and Purposes
The short title is ―Enhancing Financial Institution Safety and Soundness Act of 2010.‖ Among the
purposes of the title are to provide for the safe and sound operation of the banking system; to preserve and
protect the dual banking system of federal and state chartered depository institutions; and to streamline
and rationalize the supervision of depository institutions and their holding companies.
Section 302. Definitions
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Defines the term ―transferred employee‖ to refer to those employees who are transferred from the
Office of Thrift Supervision (―OTS‖) to the Office of the Comptroller of the Currency (―OCC‖) or the
Federal Deposit Insurance Corporation (―FDIC‖).
Subtitle A – Transfer of Powers and Duties
Section 311. Transfer Date.
The ―transfer date‖ is the date that is 1 year after the date of enactment or another date not later
than 18 months if so designated by the Secretary of the Treasury. The transfer date is the date upon which
various functions are transferred from the OTS to the Federal Reserve Board (―Board‖), the OCC, and the
FDIC. Additionally, certain functions of the Board are transferred to the OCC and FDIC. The transfer of
personnel, property and funding are also keyed to the transfer date.
Section 312. Powers and Duties Transferred.
This section transfers all functions of the OTS to the Board, the OCC, and the FDIC. It also
transfers from the Board to the OCC and the FDIC, supervisory authority over the holding companies of
smaller banks. And, it transfers from the Board to the FDIC, the supervision of insured state member
banks.
As a result of these various transfers, the Board will regulate the larger, more complex bank and
thrift holding companies – i.e., those with total consolidated assets of$50 billion or more. The OCC will
retain its authority over all national banks regardless of their size and will also supervise federal thrifts.
The OCC will become a holding company regulator for the smaller bank and thrift holding companies
(under $50 billion) where the majority of depository institution assets are in national banks or federal
thrifts. The FDIC will regulate all insured state banks regardless of their size – including those that are
members of the Federal Reserve System – and all state savings associations. The FDIC will also
supervise the smaller holding companies (under $50 billion) where the majority of depository institution
assets are in insured state banks or state thrifts.
The Board will retain its authority to issue rules under the Bank Holding Company Act and will
also have the authority to issue rules under the Home Owners Loan Act with respect to savings and loan
holding companies. When issuing rules under these acts that apply to bank and thrift holding companies
with less than $50 billion in assets, the Board must consult with the OCC and the FDIC. The OCC and
FDIC will jointly write the rules that apply to thrifts.
This section amends the definition of ―appropriate federal banking agency‖ in section 3(q) of the
Federal Deposit Insurance Act which indicates the allocation of regulatory responsibility among the
federal banking agencies by type of company – such as a national bank, a state member bank, a federal
savings association. The definition is amended to reflect the new responsibilities of the Board, FDIC, and
OCC. In addition to the description above, the Board will maintain its supervision of uninsured state
member banks and various foreign bank-related entities.
This section also requires the OCC, Board and FDIC to issue a joint regulation specifying how the
$50 billion will be calculated and at what frequency to determine the appropriate holding company
regulator. In terms of the frequency of the assessment, it can be no less than 2 years, unless with respect
to a particular institution there is a transaction outside the ordinary course of business, such as a merger or
acquisition. In issuing the regulations, the agencies are directed to avoid disruptive transfers of regulatory
authority.
Section 313. Abolishment
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This section abolishes the OTS.
Section 314. Amendments to the Revised Statutes
This section clarifies the mission and authorities of the OCC.
Section 315. Federal Information Policy
This section clarifies that the OCC is an independent agency for purposes of Federal information
policy.
Section 316. Savings Provisions
This section preserves the existing rights, duties and obligations of the OTS, the Board, and the
Federal Reserve banks that existed on the day before the transfer date. This section also preserves
existing law suits by or against the OTS, the Board, and the Federal Reserve banks, but states that as of
the transfer date, law suits against the OTS in connection with functions transferred to the OCC, the
FDIC, or Board, are transferred to these agencies as appropriate. In addition, as of the transfer date, law
suits against the Board or a Federal Reserve bank in connection with functions transferred to the OCC or
the FDIC are transferred to these agencies as appropriate.
This section also continues all of the existing orders, regulations, determinations, agreements,
procedures, interpretations and advisory materials of the OTS and those of the Board that relate to the
Board‘s functions that have been transferred.
Section 317. References in Federal Law to Federal Banking Agencies
This section provides that references in Federal law to the OTS with respect to functions that are
transferred shall be deemed references to the OCC, FDIC, or Board, as appropriate. In addition, references
in Federal law to the Board and the Federal Reserve banks with respect to their functions that are
transferred shall be deemed references to the OCC or the FDIC, as appropriate.
Section 318. Funding
This section allows the Comptroller to collect an assessment, fee, or other charge from any entity
the OCC supervises as necessary to carry out its responsibilities including with respect to holding
companies, federal thrifts, and nonbank affiliates (that are not functionally regulated) that engage in bank
permissible activities. The OCC‘s supervision of these nonbank affiliates is provided under a new section
6 of the Bank Holding Company Act of 1956 which is added in Title VI of this Act. In establishing the
amount of an assessment, fee, or other charge collected from an entity, the OCC may take into account the
funds transferred to the OCC (under a new arrangement with the FDIC), the nature and scope of the
activities of the entity, the amount and types of assets held by the entity, the financial and managerial
condition of the entity, and any other factor that the OCC deems appropriate.
This section also authorizes the FDIC to charge for its supervision of nonbank affiliates under new
section 6 of the Bank Holding Company Act.
This section requires the OCC to submit to the FDIC a proposal to promote parity in the
examination fees state and federal depository institutions having total consolidated assets of less than
$50,000,000,000 pay for their supervision.
Currently, the FDIC and the Board do not charge state banks for their federal supervision. (These
agencies share examination responsibilities with the states, and thus lower the costs to the states of
supervising these entities. While the states charge for supervision, the FDIC and Board do not.) The
FDIC pays for supervision of state banks from the Deposit Insurance Fund (DIF). Both state and federal
55

depository institutions pay insurance premiums into the DIF. Thus, national banks and federal thrifts help
defray the costs associated with the FDIC‘s supervision of state nonmember banks. This subsidy will
only grow when the FDIC assumes the supervision of all state banks and state thrifts, as well as most of
their holding companies, if the FDIC continues to rely on the DIF to fund supervision.
The funding disparity can also exacerbate regulatory arbitrage according to testimony the
Committee received. The OCC must assess its banks for examination fees whereas the FDIC and the
Board have other means to fund their supervision of state banks. [footnote to Ludwig‘s testimony,
September 29, 2009] Thus promoting parity in examination fees should reduce the arbitrage in the system
and the subsidy for federal supervision of state banks by national banks and federal thrifts.
Under this section, the OCC‘s proposal will recommend a transfer from the FDIC to the OCC of a
percentage of the amount that the OCC estimates is necessary or appropriate to carry out its supervisory
responsibilities of federal depository institutions having total consolidated assets of less than
$50,000,000,000. The FDIC is directed to assist the OCC in collecting data relative to the supervision of
State depository institutions to develop the proposal.
Not later than 60 days after receipt of the proposal, the FDIC Board must vote on the proposal and
promptly implement a plan to periodically transfer to the OCC a percentage of the amount that the OCC
estimates is necessary or appropriate to carry out the its supervisory responsibilities for national banks and
federal thrifts having total consolidated assets of less than $50,000,000,000, as approved by the FDIC
Board. Not later than 30 days after the FDIC Board‘s vote, the FDIC must submit to the Senate Banking
Committee and House Financial Services Committee a report describing the OCC‘s proposal and the
decision resulting from the FDIC Board‘s vote. If, by 2 years after the date of enactment of this Act, the
FDIC Board has failed to approve a plan, the Financial Stability Oversight Council shall approve a plan
using the dispute resolution procedures under section 119.
The section also requires the Board to collect assessments, fees, and charges from (1) bank
holding companies and savings and loan holding companies that have total consolidated assets equal to or
greater than $50 billion, and (2) all nonbank financial companies supervised by the Board under section
113 of this Act, that are equal to the total expenses incurred by the Board to carry out its responsibilities
with respect to such companies. Charging holding companies for the Board‘s supervision will result in
savings by the taxpayer.
Section 319. Contracting and Leasing Authority
This section clarifies the contracting and leasing authorities of the Office of the Comptroller of the
Currency.
Subtitle B – Transitional Provisions
Section 321. Interim Use of Funds, Personnel, and Property
This section provides for the orderly transfer of functions (1) from the OTS to the OCC, FDIC and
the Board; and (2) from the Board to the OCC and FDIC, with specific reference to funds, personnel and
property.
Section 322. Transfer of Employees
This section states that all employees of the OTS are transferred to OCC or the FDIC. The OTS,
OCC and FDIC must jointly identify the employees necessary to carry out the duties transferred from the
OTS to the OCC and the FDIC. The Board, OCC and FDIC must jointly identify the employees
56

necessary to carry out the duties transferred from the Board (including the Federal Reserve banks) to the
OCC or the FDIC.
Under this section, relevant employees are transferred within 90 days of the transfer date. The
section also describes the extent to which employees‘ status, tenure, pay, retirement and health care
benefits are protected, and describes employee protections from involuntary separation and reassignments
outside locality pay area. It also provides that not later than 2 years from the transfer date, the OCC and
FDIC must each place the transferred employees into the established pay and classification systems of the
OCC and FDIC. In addition, this section provides that the OCC and FDIC may not take any action that
would unfairly disadvantage a transferred employee relative to other OCC and FDIC employees on the
basis of their prior employment by the OTS .
Section 323. Property Transferred
This section provides that property of the OTS is transferred to the OCC and FDIC. The OCC,
FDIC and Board, will jointly determine which property of the Board should be transferred and to which
of the agencies.
Section 324. Funds Transferred
This section provides that except to the extent necessary to dispose of the affairs of the OTS, all
funds available to the OTS are transferred to the OCC, FDIC, or Board, in a manner commensurate with
the functions that are transferred to these agencies.
Section 325. Disposition of Affairs
This section describes the authority of the Director of the OTS and the Chairman of the Board
during the 90 day period beginning on the transfer date, to manage employees and property that have not
yet been transferred, and to take actions necessary to wind up matters relating to any function transferred
to another agency.
Section 326. Continuation of Services
This section states that any agency, department or instrumentality of the U.S. that was providing
support services to the OTS or the Board, in connection with functions transferred to another agency, shall
continue to provide such services until the transfer of functions is complete, and consult with the OCC,
FDIC, or Board, as appropriate, to coordinate and facilitate a prompt and orderly transition.
Subtitle C – Federal Deposit Insurance Corporation
Section 331. Deposit Insurance Reform
This section amends the Federal Deposit Insurance Act to repeal the provision that states no
institution may be denied the lowest-risk category solely because of its size. This section also directs the
FDIC, unless it makes a written determination discussed below, to amend its regulations to define the
term ―assessment base‖ of an insured depository institution for purposes of deposit insurance assessments
as the average total assets of the insured depository institution during the assessment period, minus the
sum of (1) the average tangible equity of the insured depository institution during the assessment period
and (2) the average long-term unsecured debt of the insured depository institution during the assessment
period.
If, not later than 1 year after the date of enactment of this Act, the FDIC submits to the Senate
Banking Committee and House Financial Services Committee, in writing, a finding that such an
amendment to its regulations regarding the definition of the term ―assessment base‖ would reduce the
effectiveness of the FDIC‘s risk-based assessment system or increase the risk of loss to the Deposit
57

Insurance Fund, the FDIC may retain the definition of the term ―assessment base‖, as in effect on the day
before the date of enactment of this Act, or establish, by rule, a definition of the term ―assessment base‖
that the FDIC deems appropriate.
There is concern that the new assessment base will create an additional burden on insured
depository institutions that support asset growth through increased reliance on Federal Home Loan Bank
advances. Based on its current risk-based assessment rate regulations, the FDIC imposes an upward
adjustment on an institution‘s deposit insurance assessment rate if the institution has secured liabilities,
including Federal Home Loan Bank advances, in excess of a certain threshold. This section would now
direct the FDIC to include assets funded by secured liabilities (including Federal Home Loan Bank
advances) in an institution‘s assessment base. Therefore, the Committee recommends that the FDIC also
review and adjust its risk-based assessment rate regulations, if warranted, to ensure that the assessment
appropriately reflects the risk posed by an insured depository institution as a result of the changes to the
assessment base.
Section 332. Management of the Federal Deposit Insurance Corporation
This section replaces the position of the OTS on the FDIC Board of Directors with the Director of
the Consumer Financial Protection Bureau.
Subtitle D – Termination of Federal Thrift Charter
Section 341. Termination of Federal Savings Associations
This section provides that upon the date of enactment of this Act, neither the Director of the OTS
nor the OCC may issue a charter for a federal savings association. 129
While this provision would not allow the establishment of any new federal thrifts, it does not
affect the state thrift charter. Nor does it impose any new limits on existing federal thrifts or their owners.
It would not require the divestiture of any thrift and it protects the status of existing unitary thrift holding
companies.
Section 342. Branching
This section states that a savings association that becomes a bank may continue to operate its
branches.
129 ―Congress created the federal thrift charter in the Home Owners‘ Loan Act of 1933 in
response to the extensive failures of state-chartered thrifts and the collapse of the broader
financial system during the Great Depression. The rationale for federal thrifts as a
specialized class of depository institutions focused on residential mortgage lending made
sense at the time but the case for such specialized institutions has weakened considerably
in recent years. Moreover, over the past few decades, the powers of thrifts and banks
have substantially converged.
As securitization markets for residential mortgages have grown, commercial banks have
increased their appetite for mortgage lending, and the Federal Home Loan Bank System
has expanded its membership base. Accordingly, the need for a special class of
mortgage-focused depository institutions has fallen. Moreover, the fragility of thrifts has
become readily apparent during the financial crisis. In part because thrifts are required
by law to focus more of their lending on residential mortgages, thrifts were more
vulnerable to the housing downturn that the United States has been experiencing since
2007. The availability of the federal thrift charter has created opportunities for private
sector arbitrage of our financial regulatory system.‖ ―Financial Regulatory Reform: A New Foundation,‖ Administration‘s
White Paper, introduced June 17, 2009.
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Title IV – Private Fund Investment Advisers Registration Act of 2010
Section 401. Short Title
Section 401 provides the title of the Act as the ―Private Fund Investment Advisers Registration
Act of 2010‖.
Section 402. Definitions
Section 402 defines the terms ―private fund‖ and ―foreign private adviser.‖ ―Private funds‖ are
issuers that would be regulated investment companies, but for sections 3(c)(1) or 3(c)(7) of the Investment
Company Act of 1940 (which provide exemptions for issuers with fewer than 100 shareholders or where
all shareholders are qualified purchasers).
―Foreign private advisers‖ are those that have no place of business in the United States; do not
hold themselves out generally to the public in the United States as investment advisers; and have fewer
than 15 U.S. clients with less than $25 million in assets under management.
Section 403. Elimination of Private Adviser Exemption; Limited Exemption for Foreign Private
Advisers; Limited Intrastate Exemption
Section 403 would require advisers to large hedge funds to register with the SEC, making them
subject to record keeping, examination, and disclosure requirements. The rationale for the provision is
that the unregulated status of large hedge funds constitutes a serious regulatory gap. No precise data
regarding the size and scope of hedge fund activities are available, but the common estimate is that the
funds had about $2 trillion under management before the crisis, and that amount may be magnified by
leverage. They are significant participants in many financial markets; their trades and strategies can affect
prices. While hedge funds are generally not thought to have caused the current financial crisis,
information regarding their size, strategies, and positions could be crucial to regulatory attempts to deal
with a future crisis. The case of Long-Term Capital Management, a hedge fund that was rescued through
Federal Reserve intervention in 1998 because of concerns that it was ―too-interconnected-to-fail,‖
indicates that the activities of even a single hedge fund may have systemic consequences.
Section 403 was included in the Treasury‘s Department‘s regulatory reform proposal for hedge
funds 130 . Former SEC Chairman Arthur Levitt wrote in testimony for the Senate Banking Committee that
he would ―recommend placing hedge funds under SEC regulation in the context of their role as money
managers and investment advisers.‖ 131 Advocates such as the AFL-CIO 132 , CalPERS, 133 and the
Investment Adviser Association 134 also support placing hedge funds under SEC regulation via the
Investment Advisers Act of 1940. Expert panels such as the Group of Thirty, 135 the G-20, 136 the Investor‘s
130 FACT SHEET: Administration‘s Regulatory Reform Agenda Moves Forward; Legislation for the Registration of Hedge Funds Delivered to Capitol Hill,
U.S. Department of the Treasury, Press Release, July 15, 2009, www.financialstability.gov.
131 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.9 (2009)(Testimony of Mr. Arthur Levitt).
132 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Damon Silvers).
133 Regulating Hedge Funds and Other Private Investment Pools: Testimony before the Subcommittee on Securities, Insurance, and Investment of the U.S.
Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Joseph Dear).
134 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. David Tittsworth).
135 Financial Reform: A Framework for Financial Stability, Group of Thirty, January 15, 2009.
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Working Group, 137 and the Congressional Oversight Panel 138 also support this provision, as do industry
groups such as the Alternative Investment Management Association, 139 the Private Equity Council, 140 and
the Coalition of Private Investment Companies (CPIC). Mr. James Chanos, Chairman of the CPIC,
testified before the Committee that ―private funds (or their advisers) should be required to register with
the SEC.…Registration will bring with it the ability of the SEC to conduct examinations and bring
administrative proceedings against registered advisers, funds, and their personnel. The SEC also will have
the ability to bring civil enforcement actions and to levy fines and penalties for violations.‖ 141 Former
SEC Chief Accountant Lynn Turner also supported this provision in testimony. 142
A significant number of hedge funds are already registered with the SEC, on a voluntary basis.
Hedge Fund Research reports that nearly 55 percent of the hedge fund firms located in the United States
are currently registered with the SEC, and that SEC-registered hedge fund firms manage nearly 71 percent
of all US-based hedge fund capital.
Section 403 eliminates the exemption in section 203(b)(3) of the Investment Advisers Act of 1940
for advisers with fewer than 15 clients. Under current law, a hedge fund is counted as a single client,
allowing hedge fund advisers to escape the obligation to register with the SEC. The Section adds an
exemption for foreign private advisers, as defined in this Act. The Section adds a limited intrastate
exemption, and an exemption for Small Business Investment Companies licensed by (or in the process of
obtaining a license from) the Small Business Administration.
Section 404. Collection of Systemic Risk Data; Reports; Examinations; Disclosures
Section 404 authorizes the SEC to require advisers to private funds to file specific reports, which
the SEC shall share with the Financial Stability Oversight Council. The filings shall describe the amount
of assets under management, use of leverage, counterparty credit risk exposure, trading and investment
positions, valuation policies, types of assets held, and other information that the SEC, in consultation with
the Council, determines is necessary and appropriate to protect investors or assess systemic risk.
Reporting requirements may be tailored to the type or size of the private fund. Frequency of reporting is at
the SEC‘s discretion.
Paul Schott Stevens, President of the Investment Company Institute, testified before the
Committee that ―the Capital Markets Regulator should require nonpublic reporting of information, such
as investment positions and strategies that could bear on systemic risk and adversely impact other market
participants.‖ 143 Richard Ketchum, Chairman of FINRA, said ―The absence of transparency about hedge
funds and their investment positions is a concern.‖ 144 Hedge fund industry groups also support this
provision, including the Managed Funds Association, 145 the Coalition of Private Investment
Companies, 146 and the Private Equity Council. 147
136 Enhancing Sound Regulation and Strengthening Transparency, G20 Working Group 1, March 25, 2009.
137 U.S. Financial Regulatory Reform: An Investor‘s Perspective, Investor‘s Working Group, July 2009.
138 Special Report on Regulatory Reform, Congressional Oversight Panel, January 2009.
139 Alternative Investment Management Association (January 23, 2009) ―AIMA Supports US Regulatory Reform Proposals‖, Press Release, www.aima.org.
140 Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, and Creating a National Insurance
Office: Testimony before the U.S. House Committee on Financial Services, 111 th Congress, 1 st session (2009)(Testimony of Mr. Douglas Lowenstein).
141 Regulating Hedge Funds and Other Private Investment Pools: Testimony before the Subcommittee on Securities, Insurance, and Investment of the U.S.
Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st session, p.17 (2009)(Testimony of Mr. James Chanos).
142 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Lynn Turner).
143 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.12 (2009)(Testimony of Mr. Paul Schott Stevens).
144 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.5 (2009)(Testimony of Mr. Richard Ketchum).
145 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, (2009)(Testimony of Mr. Richard Baker).
146 Regulating Hedge Funds and Other Private Investment Pools: Testimony before the Subcommittee on Securities, Insurance, and Investment of the U.S.
Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. James Chanos).
60

Section 404 requires the SEC to make available to the Financial Stability Oversight Council any
private fund records it receives that the Council considers necessary to assess the systemic risk posed by a
private fund. These records must be kept confidential: the Council must observe the same standards of
confidentiality that apply to the SEC. Private fund records, including those containing proprietary
information, are not subject to disclosure pursuant to the Freedom of Information Act.
This section also directs the SEC to report annually to Congress on how it has used information
collected from private funds to monitor markets for the protection of investors and market integrity.
Section 405. Disclosure Provision Eliminated
Section 405 authorizes the SEC to require investment advisers to disclose the identity,
investments, or affairs of any client, if necessary to assess potential systemic risk.
Section 406. Clarification of Rulemaking Authority
Section 406 clarifies the SEC‘s authority to define technical, trade, and other terms used in the
title, except that the SEC may not define ―client‖ to mean investors in a fund, rather than the fund itself,
for purposes of Section 206 (1) and (2) of the Advisers Act, which governs fraud. The clarification avoids
potential conflicts between the fiduciary duty an adviser owes to a private fund and to the individual
investors in the fund (if those investors are defined as clients of the adviser). Actions in the best interest of
the fund may not always be in the best interests of each individual investor. The section also directs the
SEC and CFTC to jointly promulgate rules regarding the form and content of reporting by firms that are
registered with both agencies.
Section 407. Exemptions of Venture Capital Fund Advisers
The Committee believes that venture capital funds, a subset of private investment funds
specializing in long-term equity investment in small or start-up businesses, do not present the same risks
as the large private funds whose advisers are required to register with the SEC under this title. Their
activities are not interconnected with the global financial system, and they generally rely on equity
funding, so that losses that may occur do not ripple throughout world markets but are borne by fund
investors alone. Terry McGuire, Chairman of the National Venture Capital Association, wrote in
congressional testimony that ―venture capital did not contribute to the implosion that occurred in the
financial system in the last year, nor does it pose a future systemic risk to our world financial markets or
retail investors.‖ 148 Section 407 directs the SEC to define ―venture capital fund‖ and provides that no
investment adviser shall become subject to registration requirements for providing investment advice to a
venture capital fund.
Section 408. Exemption of and Record Keeping by Private Equity Fund Advisers
The Committee believes that private equity funds characterized by long-term equity investments in
operating businesses do not present the same risks as the large private funds whose advisers are required
to register with the SEC under this title. Private equity investments are characterized by long-term
commitments of equity capital—investors generally do not have redemption rights that could force the
funds into disorderly liquidations of their positions. Private equity funds use limited or no leverage at the
fund level, which means that their activities do not pose risks to the wider markets through credit or
counterparty relationships. Accordingly, Section 408 directs the SEC to define ―private equity fund‖ and
provides an exemption from registration for advisers to private equity funds.
147 Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, and Creating a National Insurance
Office: Testimony before the U.S. House Committee on Financial Services, 111 th Congress, 1 st session (2009)(Testimony of Mr. Douglas Lowenstein).
148 Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, and Creating a National Insurance
Office: Testimony before the U.S. House Committee on Financial Services, 111 th Congress, 1 st session, p.15 (2009)(Testimony of Mr. Terry McGuire).
61

Informed observers believe that in some cases the line between hedge funds and private equity
may not be clear, and that the activities of the two types of funds may overlap. We expect the SEC to
define the term ―private equity fund‖ in a way to exclude firms that call themselves ―private equity‖ but
engage in activities that either raise significant potential systemic risk concerns or are more characteristic
of traditional hedge funds. The section requires advisers to private equity funds to maintain such records,
and provide to the SEC such annual or other reports, as the SEC determines necessary and appropriate in
the public interest and for the protection of investors.
Section 409. Family Offices
Family offices provide investment advice in the course of managing the investments and financial
affairs of one or more generations of a single family. Since the enactment of the Investment Advisers Act
of 1940, the SEC has issued orders to family offices declaring that those family offices are not investment
advisers within the intent of the Act (and thus not subject to the registration and other requirements of the
Act). The Committee believes that family offices are not investment advisers intended to be subject to
registration under the Advisers Act. The Advisers Act is not designed to regulate the interactions of
family members, and registration would unnecessarily intrude on the privacy of the family involved.
Accordingly, Section 409 directs the SEC to define ―family office‖ and excludes family offices from the
definition of investment adviser Section 202(a)(11) of the Advisers Act.
Section 409 directs the SEC to adopt rules of general applicability defining ―family offices‖ for
purposes of the exemption. The rules shall provide for an exemption that is consistent with the SEC‘s
previous exemptive policy and that takes into account the range of organizational and employment
structures employed by family offices. The Committee recognizes that many family offices have become
professional in nature and may have officers, directors, and employees who are not family members, and
who may be employed by the family office itself or by an affiliated entity. Such persons (and other
persons who may provide services to the family office) may co-invest with family members, enabling
them to share in the profits of investments they oversee, and better aligning the interests of such persons
with those of the family members served by the family office. The Committee expects that such
arrangements would not automatically exclude a family office from the definition.
Section 410. State and Federal Responsibilities; Asset Threshold for Federal Registration of
Investment Advisers
Section 410 increases the asset threshold above which investment advisers must register with the
SEC from $25,000,000 to $100,000,000. States will have responsibility for regulating advisers with less
than $100,000,000 in assets under management. The Committee expects that the SEC, by concentrating
its examination and enforcement resources on the largest investment advisers, will improve its record in
uncovering major cases of investment fraud, and that the States will provide more effective surveillance
of smaller funds. In a letter to Chairman Dodd and Ranking Member Shelby, the North American
Securities Administrators Association stated that ―State securities regulators are ready to accept the
increased responsibility for the oversight of investment advisers with up to $100 million in assets under
management. The state system of investment adviser regulation has worked well with the $25 million
threshold since it was mandated in 1996 and states have developed an effective regulatory structure and
enhanced technology to oversee investment advisers.… An increase in the threshold would allow the SEC
to focus on larger investment advisers while the smaller advisers would continue to be subject to strong
state regulation and oversight.‖ 149
149 North American Securities Administrators Association, letter to Chairman Dodd and Ranking Member Shelby, November 17, 2009.
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In a letter to Senate Banking Committee staff in October 2009, Professor Mercer Bullard stated, ―I
support the $100 million threshold. This merely restores the distribution of advisers between the SEC and
states that existed at the time they were split by [the National Securities Markets Improvement Act].‖
Section 411. Custody of Client Assets
Section 411 requires registered investment advisers to comply with SEC rules for the safeguarding
of client assets and to use independent public accountants to verify assets. The SEC has recently adopted
new rules imposing heightened standards for custody of client assets. Mr. James Chanos, Chairman of the
Coalition of Private Investment Companies, wrote in testimony for the Committee that ―Any new private
fund legislation should include provisions to reduce the risks of Ponzi schemes and theft by requiring
money managers to keep client assets at a qualified custodian, and by requiring investment funds to be
audited by independent public accounting firms that are overseen by the PCAOB.‖ 150
Professor John Coffee wrote in testimony for the Senate Banking Committee that ―the custodian
requirement largely removes the ability of an investment adviser to pay the proceeds invested by new
investors to old investors. The custodian will take the instructions to buy or sell securities, but not to remit
the proceeds of sales to the adviser or to others (except in return for share redemptions by investors). At a
stroke, this requirement eliminates the ability of the manager to ‗recycle‘ funds from new to old
investors.‖ 151 SEC Inspector General H. David Kotz also supports this provision. 152
Section 412. Adjusting the Accredited Investor Standard for Inflation
Accredited investor status, defined in SEC regulations under the Securities Act of 1933, is
required to invest in hedge funds and other private securities offerings. Accredited investors are presumed
to be sophisticated, and not in need of the investor protections afforded by the registration and disclosure
requirements that apply to public offerings. For individuals, the accredited investor thresholds are dollar
amounts for annual income ($200,000 or $3000,000 for an individual and spouse) and net worth ($1
million, which may include the value of a person‘s primary residence). These amounts have not been
adjusted since 1982; some observers believe that because of inflation and real estate price appreciation
many individuals who now meet the accredited investor standard may lack the degree of financial
expertise that was implied by the thresholds when they were established nearly three decades ago. The
North American Securities Administrators Association wrote in a 2007 comment letter to the SEC that
―NASAA has long advocated for adjusting the definition of ‗accredited investor‘ in light of inflation and
has expressed concern at the length of time the thresholds contained in the definition have not been
adjusted… [I]nflation has seriously eroded the efficacy of the existing thresholds in the definition of
‗accredited investor‘ since their adoption in 1982. NASAA further supports an inflation adjustment every
five years.‖ 153
Section 412 requires the SEC to increase the dollar thresholds for accredited investor status, to
take into account price inflation since the current figures were established. The Section also directs the
SEC to adjust those figures at least every five years to reflect the percentage increase in the cost of living.
This provision is intended to increase investor protection by limiting participation in private securities
offerings to investors who are capable of evaluating the risks of such offerings.
Section 413. GAO Study and Report on Accredited Investors
150 Regulating Hedge Funds and Other Private Investment Pools: Testimony before the Subcommittee on Securities, Insurance, and Investment of the U.S.
Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st session, p. 18 (2009)(Testimony of Mr. James Chanos).
151 Madoff Investment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform: Testimony before the U.S. Senate Committee on
Banking, Housing, and Urban Affairs, 111 th Congress, 1 st session, pp.8,10 (2009)(Testimony of Professor John Coffee).
152 SEC Inspector General H.David Kotz, letter to Senator Dodd, October 29, 2009.
153 North American Securities Administrators Association, comment letter in response to SEC proposed rule Revisions of Limited Offering Exemptions in
Regulation D, Release No. 33 8828; IC-27922; File No. S7-18-07, October 26, 2007.
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Section 413 directs the GAO to submit a report on the appropriate criteria for accredited investor
status and eligibility to invest in private funds. The goal of the exemptions for accredited investors is to
identify a category of investors who have sufficient knowledge and expertise to fend for themselves in
making investment decisions. Currently, this category is identified by salary or wealth. However, we
recognize that these are imperfect standards. For example, a person‘s wealth may include a valuable
primary residence but little liquid cash, or a wealthy person may be a widow or widower with a large
inheritance, but little investment expertise. Accordingly, we ask the GAO to determine whether other
measures would be more appropriate.
Section 414. GAO Study on Self-Regulatory Organization For Private Funds
Section 414 directs the GAO to study the feasibility of creating a self-regulatory organization to
oversee private funds—which can include hedge funds, private equity funds, and venture capital funds.
Section 415. Commission Study and Report on Short Selling
Section 415 directs the Office of Risk, Strategy, and Financial Innovation of the SEC to conduct a
study on the current state of short selling, the impact of recent SEC rules, the recent incidence of failures
to deliver, the practice of delivering shares sold short on the fourth day following the trade, and
consideration of real time reporting of short positions.
Section 416. Transition Period
Section 416 provides that the title becomes effective one year after the date of enactment of this
Act, but advisers to private funds may voluntarily register with the SEC during that 1-year period.
Section 501. Short Title
Title V – Insurance
Subtitle A – Office of National Insurance
Section 502. Establishment of Office of National Insurance
This section establishes the Office of National Insurance (―Office‖) within the Department of the
Treasury. The Office, to be headed by a career Senior Executive Service Director appointed by the
Secretary of the Treasury (―Secretary‖), will have the authority to: (1) monitor all aspects of the insurance
industry; (2) recommend to the Financial Stability Oversight Council (―Council‖) that the Council
designate an insurer, including its affiliates, as an entity subject to regulation by the Board of Governors
as a nonbank financial company as defined in Title I of the Restoring American Financial Stability Act;
(3) assist the Secretary in administering the Terrorism Risk Insurance Program; (4) coordinate Federal
efforts and establish Federal policy on prudential aspects of international insurance matters; (5) determine
whether State insurance measures are preempted by International Insurance Agreements on Prudential
Measures; and (6) consult with the States regarding insurance matters of national importance and
prudential insurance matters of international importance. The authority of the Office extends to all lines
of insurance except health insurance and crop insurance.
In carrying out its functions, the Office may collect data and information on the insurance industry
and insurers, as well as issue reports. It may require an insurer or an affiliate to submit data or
information reasonably required to carry out functions of the Office, although the Office may establish an
exception to data submission requirements for insurers meeting a minimum size threshold. Before
collecting any data or information directly from an insurer, the Office must first coordinate with each
relevant State insurance regulator (or other relevant Federal or State regulatory agency, in the case of an
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affiliate) to determine whether the information is available from such State insurance regulator or other
regulatory agency. The Office will have power to require by subpoena that an insurer produce the data or
information requested, but only upon a written finding by the Director that the data or information is
required to carry out its functions and that it has coordinated with relevant regulator or agency as required.
The subpoena authority is intended to be an option of last resort that would very rarely be used, since it is
expected that the relevant regulator or agency and the insurers would cooperate with reasonable requests
for data or information by the Office. Any non-publicly available data and information submitted to the
Office will be subject to confidentiality provisions: privileges are not waived; any requirements regarding
privacy or confidentiality will continue to apply; and information contained in examination reports will be
considered subject to the applicable exemption under the Freedom of Information Act for this type of
information.
The Director will determine whether a State insurance measure is preempted because it: (a) results
in less favorable treatment of a non-United States insurer domiciled in a foreign jurisdiction that is subject
to an International Insurance Agreement on Prudential Measures than a United States insurer domiciled,
licensed, or otherwise admitted in that State and (b) is inconsistent with an International Insurance
Agreement on Prudential Measures. However, the savings clause provides that nothing in this section
preempts any State insurance measure that governs any insurer‘s rates, premiums, underwriting or sales
practices, State coverage requirements for insurance, application of State antitrust laws to the business of
insurance, or any State insurance measure governing the capital or solvency of an insurer (except to the
extent such measure results in less favorable treatment of a non-United States insurer than a United States
insurer). The savings clause is intended to shield these important State consumer protection measures
from preemption.
An ―International Insurance Agreement on Prudential Measures‖ is defined as a written bilateral
or multilateral agreement entered into between the United States and a foreign government, authority, or
regulatory entity regarding prudential measures applicable to the business of insurance or reinsurance.
Before making a determination of inconsistency, the Director will notify and consult with the appropriate
State, publish a notice in the Federal Register, and give interested parties the opportunity to submit
comments. Upon making the determination, the Director will notify the appropriate State and Congress,
and establish a reasonable period of time before the preemption will become effective. At the conclusion
of that period, if the basis for the determination still exists, the Director will publish a notice in the
Federal Register that the preemption has become effective and notify the appropriate State.
The Director will consult with State insurance regulators, to the extent the Director determines
appropriate, in carrying out the functions of the Office. Nothing in this section will be construed to give
the Office or the Treasury Department general supervisory or regulatory authority over the business of
insurance.
The Director must submit a report to the President and to Congress by September 30th of each
year on the insurance industry and any actions taken by the Office regarding preemption of inconsistent
State insurance measures.
The Director must also conduct a study and submit a report to Congress within 18 months of the
enactment of this section on how to modernize and improve the system of insurance regulation in the
United States. The study and report must be guided by the following six considerations: (1) systemic risk
regulation with respect to insurance; (2) capital standards and the relationship between capital allocation
and liabilities; (3) consumer protection for insurance products and practices; (4) degree of national
uniformity of state insurance regulation; (5) regulation of insurance companies and affiliates on a
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consolidated basis; and (6) international coordination of insurance regulation. The study and report must
also examine additional factors as set forth in this section.
This section also authorizes the Secretary of the Treasury to negotiate and enter into International
Insurance Agreements on Prudential Measures on behalf of the United States. However, nothing in this
section will be construed to affect the development and coordination of the United States international
trade policy or the administration of the United States trade agreements program. The Secretary will
consult with the United State Trade Representative on the negotiation of International Insurance
Agreements on Prudential Measures, including prior to initiating and concluding any such agreements.
Subtitle B. State-Based Insurance Reform
Section 511. Short Title.
This subtitle may be cited as the ―Nonadmitted and Reinsurance Reform Act of 2009‖.
Section 512. Effective Date
Part I – Nonadmitted Insurance
Sec. 521. Reporting, Payment, and Allocation of Premium Taxes
Gives the home State of the insured (policyholder) sole regulatory authority over the collection
and allocation of premium tax obligations related to nonadmitted insurance (also known as surplus lines
insurance). States are authorized to enter into a compact or other agreement to establish uniform
allocation and remittance procedures. Insured‘s home State may require surplus lines brokers and
insureds to file tax allocation reports detailing portion of premiums attributable to properties, risks, or
exposures located in each state.
Sec. 522. Regulation of Nonadmitted Insurance by Insured‘s Home State
Unless otherwise provided, insured‘s home State has sole regulatory authority over nonadmitted
insurance, including broker licensing.
Sec. 523. Participation in National Producer Database
State may not collect fees relating to licensing of nonadmitted brokers unless the State participates
in the national insurance producer database of the National Association of Insurance Commissioners
(NAIC) within 2 years of enactment of this subtitle.
Sec. 524. Uniform Standards For Surplus Lines Eligibility
Streamlines eligibility requirements for nonadmitted insurance providers with the eligibility
requirements set forth in the NAIC‘s Nonadmitted Insurance Model Act.
Sec. 525. Streamlined Application for Commercial Purchasers
Allows exempt commercial purchasers, as defined in section 527, easier access to the nonadmitted
marketplace by waiving certain requirements.
Sec. 526. GAO Study of Nonadmitted Insurance Market
The Comptroller General shall conduct a study of the nonadmitted insurance market to determine
the effect of the enactment of this part on the size and market share of the nonadmitted market. The
Comptroller General shall consult with the NAIC and produce this report within 30 months after the
effective date.
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Sec. 527. Definitions
Among others, defines Exempt Commercial Purchasers and details the qualifications necessary to
qualify as such for the purposes of section 525.
Part II – Reinsurance
Sec. 531. Regulation of Credit for Reinsurance and Reinsurance Agreements
Prohibits non-domiciliary States from denying credit for reinsurance if the State of domicile of a
ceding insurer is an NAIC-accredited State or has solvency requirements substantially similar to those
required for NAIC accreditation. Prohibits non-domiciliary States from restricting or eliminating the
rights of reinsurers to resolve disputes pursuant to contractual arbitration clauses, prohibits nondomiciliary
States from ignoring or eliminating contractual agreements on choice of law determinations,
and prohibits non-domiciliary States from enforcing reinsurance contracts on terms different from those
set forth in the reinsurance contract.
Sec. 532. Solvency Regulation
State of domicile of the reinsurer is solely responsible for regulating the financial solvency of the
reinsurer. Non-domiciliary States may not require reinsurer to provide any additional financial
information other than the information required by State of domicile. Non-domiciliary States are required
to be provided with copies of the financial information that is required to be filed with the State of
domicile.
Sec. 533. Definitions
Among others, defines a reinsurer and clarifies how a insurer could be determined as a reinsurer
under the laws of the state of domicile.
Part III – Rule of Construction
Sec. 541. Rule of Construction
Clarifies that this subtitle will not modify, impair, or supersede the application of antitrust laws,
confirms that any potential conflict between this subtitle and the antitrust laws will be resolved in favor of
the operation of the antitrust laws.
Sec. 542. Severability
States that if any section, subsection, or application of this subtitle is held to be unconstitutional,
the remainder of the subtitle shall not be affected.
Title VI – Bank and Savings Association Holding Company and Depository
Institution Regulatory Improvements Act of 2009
Section 601. Short Title
The short title of this section is the ―Bank and Savings Association Holding Company and
Depository Institution Regulatory Improvements Act of 2010.‖
Section 602. Definitions
This section defines the term ―commercial firm‖ as any entity that derives not less than 15 percent of
the consolidated annual gross revenues of the entity, including all affiliates of the entity, from engaging in
activities that are not financial in nature or incidental to activities that are financial in nature, as provided
in section 4(k) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(k)).
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Section 603. Moratorium and Study on Treatment of Credit Card Banks, Industrial Loan
Companies, Trust Banks and Certain Other Companies as Bank Holding Companies under the
Bank Holding Company Act
This section imposes a three-year moratorium on the ability of the Federal Deposit Insurance
Corporation to approve a new application for deposit insurance for an industrial loan company, credit card
bank, or trust bank that is owned or controlled by a commercial firm. During this period, the appropriate
Federal banking agency may not approve a change in control, of an industrial bank, a credit card bank, or
a trust bank if the change in control would result in direct or indirect control of the industrial bank, credit
card bank, or trust bank by a commercial firm, unless the bank is in danger of default, or unless the
change in control results from the merger or whole acquisition of a commercial firm that directly or
indirectly controls the industrial bank, credit card bank, or trust bank in a bona fide merger with or
acquisition by another commercial firm.
In addition, this section provides that within 18 months of enactment of this Act, the Comptroller
General must submit a report to Congress analyzing whether it is necessary to eliminate the exceptions in
the Bank Holding Company Act of 1956 (BHCA) for credit card banks, industrial loan companies, trust
banks, thrifts, and certain other companies, in order to strengthen the safety and soundness of these
institutions or the stability of the financial system.
The Treasury Department‘s legislative proposal for financial reform includes a provision that
would have eliminated the exceptions in the BHCA for credit card banks, industrial loan companies, trust
banks and certain other limited purpose banks. 154 Under this proposal, firms owning such companies,
including commercial firms, would have been subject to regulation as bank holding companies. As a
consequence, these firms would have been required to divest of certain financial businesses in accordance
with BHCA activity limitations, and would have been subject to new capital requirements. The
Committee is seeking additional information through the GAO to determine whether this new supervisory
regime should be applied to firms that own credit card banks, industrial loan companies, trust banks, or
other limited purpose banks.
Section 604. Reports and Examinations of Bank Holding Companies; Regulation of
Functionally Regulated Subsidiaries
This section removes limitations on the ability of the appropriate Federal banking agency (AFBA)
for a bank or savings and loan holding company to obtain reports from, examine, and regulate all
subsidiaries of the holding company. The Committee agrees with testimony provided by Governor Daniel
K. Tarullo, on behalf of the Board of Governors of the Federal Reserve System (Federal Reserve) ―that to
be fully effective, consolidated supervisors need the information and ability to identify and address risk
throughout an organization.‖ 155 For this reason, this section removes the so-called Fed-lite provisions of
the Gramm-Leach-Bliley Act that placed limitations on the ability of the Federal Reserve to examine,
obtain reports from, or take actions to identify or address risks with respect to subsidiaries of a bank
holding company that are supervised by other agencies. However, this section also requires the AFBA for
the holding company to coordinate with other Federal and state regulators of subsidiaries of the holding
company, to the fullest extent possible, to avoid duplication of examination activities, reporting
requirements, and requests for information.
154 FACT SHEET: ADMINISTRATION‘S REGULATORY REFORM AGENDA MOVES FORWARD; Legislation for Strengthening Investor Protection
Delivered to Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 2009, www.financialstability.gov.
155 Strengthening and Streamlining Prudential Bank Supervision – Part I: Testimony of Daniel K. Tarullo, Member Board of Governors of the Federal Reserve
System, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 2nd session, p.13 (August 4, 2009).
68

While the Committee supports consolidated regulation, it also supports coordinated regulation.
Accordingly, section 604(b) requires the AFBA for a bank holding company to give prior notice to, and to
consult with, the primary regulator of a subsidiary before commencing an examination of that subsidiary.
The section contains an identical requirement with respect to the examination by the AFBA for a savings
and loan holding company of a subsidiary of a savings and loan holding company. Other provisions in
section 604 specifically require the holding company regulator to rely ―to the fullest extent possible‖ on
reports and supervisory information that are available from sources other than the subsidiary itself,
including information that is ―otherwise available‖ from other Federal or State regulators of the
subsidiary. These provisions effectively require that the holding company regulator provide notice to and
consult with the primary regulator, e.g., the appropriate Federal banking agency for a depository
institution, to identify the information it wants and ascertain whether that information already is available
from the primary regulator.In addition, section 604 specifically requires the AFBA for the holding
company to coordinate with other Federal and state regulators of subsidiaries of the holding company, ―to
the fullest extent possible, to avoid duplication of examination activities, reporting requirements, and
requests for information.‖
This section also requires the AFBA for the holding company to consider risks to the stability of
the United States banking or financial system when reviewing bank holding company proposals to engage
in mergers, acquisitions, or nonbank activities or financial holding company proposals to engage in
activities that are financial in nature. A financial holding company also may not engage in certain
activities that are financial in nature without the approval of the AFBA for the holding company if they
involve the acquisition of assets that exceed $25 billion.
In addition, the section amends the Home Owners‘ Loan Act to clarify the authority of the AFBA
of a savings and loan holding company to examine and require reports from the savings and loan holding
company and all of its subsidiaries. It also directs the AFBA to coordinate its supervisory activities with
other Federal and state regulators of the holding company subsidiaries.
Section 605. Assuring Consistent Oversight of Permissible Activities of Depository Institution
Subsidiaries of Holding Companies
This section requires the ―lead Federal banking agency‖ for each depository institution holding
company to examine the bank permissible activities of each non-depository institution subsidiary (other
than a functionally regulated subsidiary) of the depository institution holding company to determine
whether the activities present safety and soundness risks to any depository institution subsidiary of the
holding company. For purposes of this section, ―lead Federal banking agency‖ is defined as (1) the Office
of the Comptroller of the Currency for holding companies with Federally-chartered depository institution
subsidiaries, or where total consolidated assets in its Federally-chartered depository institution
subsidiaries exceed those in its State-chartered depository institution subsidiaries or (2) the Federal
Deposit Insurance Corporation for holding companies with state-chartered depository institution
subsidiaries, or where total consolidated assets in its state-chartered depository institution subsidiaries
exceed those in its Federally-chartered depository institution subsidiaries. The ―lead Federal banking
agency‖ can recommend that the Federal Reserve take enforcement action against a non-depository
subsidiary where the Board is the holding company regulator. If the Federal Reserve does not take
enforcement action within 60-days of receiving the recommendation, the ―lead Federal banking agency‖
may take enforcement action against the non-depository institution.
This provision addresses the problem of the uneven supervisory standards under today‘s
regulatory regime, applicable to depository and non-depository subsidiaries holding companies,
highlighted by John C. Dugan, Comptroller of the Currency, in his testimony before the Committee.
Changes made by this section are consistent with the recommendation of Comptroller Dugan that where
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subsidiaries are engaged in the same business as is conducted, or could be conducted, by an
affiliated bank – mortgage or other consumer lending, for example – the prudential supervisor
already has the resources and expertise needed to examine the activity. Affiliated companies
would then be made subject to the same standards and examined with the same frequency as the
affiliated bank. This approach also would ensure that the placement of an activity in a holding
company structure could not be used to arbitrage between different supervisory regimes or
approaches. 156
Section 606. Requirements for Financial Holding Companies to Remain Well Capitalized and Well
Managed
This section amends the BHCA to require all financial holding companies engaging in expanded
financial activities to remain well capitalized and well managed.
Section 607. Standards for Interstate Acquisitions and Mergers
This section raises the capital and management standards for bank holding companies engaging in
interstate bank acquisitions by requiring them to be well capitalized and well managed. In addition,
interstate mergers of banks will only be permitted if the resulting bank is well capitalized and well
managed.
Section 608. Enhancing Existing Restrictions on Bank Transactions with Affiliates
This section amends section 23A of the Federal Reserve Act by, among other things, defining an
investment fund, for which a member bank is an investment adviser, as an affiliate of the member bank.
It also adds credit exposure from a securities borrowing or lending transaction or derivative
transaction to the list of inter-affiliate ―covered transactions‖ in section 23A. The Federal Reserve is
provided the discretion to define ―credit exposure.‖ In addition, the Federal Reserve may issue
regulations or interpretations with respect to the manner in which a netting agreement may be taken into
account in determining the amount of a covered transaction between a member bank or a subsidiary and
an affiliate, including the extent to which netting agreements between a member bank or a subsidiary and
an affiliate may be taken into account in determining whether a covered transaction is fully secured for
purposes of subsection (d)(4) of section 23A.
This provision represents a second attempt by Congress to address the credit exposure to banks
from affiliate derivative transactions. Section 121 of the Gramm-Leach-Bliley Act provided that ―not
later than 18 months after November 12, 1999, the Federal Reserve shall adopt final rules under this
section [23A of the Federal Reserve Act] to address as covered transactions credit exposure arising out of
derivative transactions between member banks and their affiliates.‖ 157 In 2002, the Federal Reserve
announced that it ―expects to issue, in the near future, a proposed rule that would invite public comment
on how to treat as covered transactions under section 23A certain derivative transactions that are the
functional equivalent of a loan by a member bank to an affiliate or the functional equivalent of an asset
purchase by a member bank from an affiliate.‖ 158 However, the proposed rule was not issued.
The bank regulatory framework must address bank credit exposure to affiliates from derivative
transactions to limit a bank‘s exposure to loss in the event of the failure of an affiliate. Over the last two
years, the Committee has heard testimony regarding the damage to the U.S. economy caused by
156 Strengthening and Streamlining Prudential Bank Supervision – Part I: Testimony of John C. Dugan, Comptroller of the Currency, before the U.S. Senate
Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 2nd session, p.17 (August 4, 2009).
157 Pub. L. 106-102, Title I, section 121(b), 113 Stat. 1378 (November 12, 1999).
158 69 Fed Reg. 239 (December 12, 2002).
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derivatives. Inter-affiliate derivative transactions are a major source of intra-firm complexity among the
largest depository institutions. Moreover, tight limits on traditional credit exposures of banks to affiliates,
such as loans, and no limits on nontraditional credit exposures of banks to affiliates, such as derivatives,
have created a perverse incentive for banks to engage with their affiliates in these more complex, volatile
and opaque transaction forms.
Placing limits on derivative transactions will result in greater transparency and disclosure of
derivative transactions between banks and their affiliates, a reduction in the volume of internal riskshifting
transactions, and in the simplification of the internal structures of our major financial firms.
Section 609. Eliminating Exceptions for Transactions with Financial Subsidiaries
This section amends section 23A of the Federal Reserve Act by eliminating the special treatment
for transactions with financial subsidiaries.
Section 610. Lending Limits Applicable to Credit Exposure on Derivative Transactions,
Repurchase Agreements, Reverse Repurchase Agreements, and Securities Lending and Borrowing
Transactions
This section tightens national bank lending limits by treating credit exposures on derivatives,
repurchase agreements, and reverse repurchase agreements as extensions of credit for the purposes of
national bank lending limits. Accordingly, banks must take into account these exposures for purposes of
the affiliate transaction limitations described in section 608, the insider transaction limits described in
section 614, but also for purposes of lending limits that apply to non-affiliated third parties.
Section 611. Application of National Bank Lending Limits to Insured State Banks
This section requires all insured depository institutions to comply with national bank lending
limits. This legislation applies national bank lending limits to insured state banks for several reasons.
First, lending limits restrict the percentage of a bank‘s capital that can be loaned to a single borrower and
are one of the core safety and soundness laws applicable to bank operations. In most all similar areas
involving safety and soundness (capital adequacy, affiliate transaction limits, limits on loans to executive
officers, and limits on loans to insiders) there is a uniform Federal standard that applies to all insured
depository institutions. It is the view of the Committee that, as a matter of good public policy, banks
should be subject to a uniform Federal standard with respect to lending limits, and should not compete on
the basis of differences in safety and soundness regulation. A second reason relates to section 610 of the
legislation that requires exposure from derivatives transactions to be included in Federal lending limits.
State bank lending limits typically do not address derivatives. This section addresses the Committee‘s
concern that if uniform restrictions in this area do not apply across the banking sector, risky derivative
activities could migrate to state banks, or national banks may seek state charters to escape from regulation
in this area. This section includes a 2-year transition period to ensure that state banks have adequate time
to implement these new limits.
Section 612. Restriction on Conversions of Troubled Banks and Savings Associations
This section prohibits conversions from a national bank charter to a state bank or savings
association charter or vice versa during any time in which a bank or savings association is subject to a
cease and desist order, other formal enforcement action, or memorandum of understanding. It also
prohibits the conversion of a federal savings association to a national or state bank or state savings
association under these circumstances.
As Governor Daniel K. Tarullo noted in his testimony to the Committee, on behalf of the Federal
Reserve, ―while institutions may engage in charter conversions for a variety of sound business reasons,
conversions that are motivated by a hope of escaping current or prospective supervisory actions by the
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institution‘s existing supervisor undermine the efficacy of the prudential supervisory framework.‖ 159 The
Federal Financial Institutions Examination Council (FFIEC) recently issued a Statement on Regulatory
Conversions declaring that supervisors will only consider applications undertaken for legitimate reasons
and will not entertain regulatory conversion applications that undermine the supervisory process. 160 This
section codifies this important principle.
Section 613. De Novo Branching into States
This section expands the ability of a national bank or state bank to establish a de novo branch in
another state. In the age of Internet transactions, such branching restrictions are anachronistic and
ineffectual.
Section 614. Lending Limits to Insiders
This section expands the type of transactions subject to insider lending limits to include
derivatives transactions, repurchase agreements, reverse repurchase agreements, and securities lending or
borrowing transactions. This section is consistent with this legislation‘s expansion of affiliate transaction
limits in section 608, and lending limits applicable to non-affiliated third parties in section 610, and to
include such exposures.
Section 615. Limitations on Purchases of Assets from Insiders
This section prohibits insured depository institutions from entering into asset purchase or sales
transactions with its executive officers, directors, or principal shareholders or a related interest unless the
transaction is on market terms and, if the transaction represents more than ten percent of the capital and
surplus of the institution, has been approved in advance by a majority of the disinterested members of the
board.
This section replaces and expands a similar provision in section 22(d) of the Federal Reserve Act
(12 U.S.C. 375) that simply restricts purchases and sales transactions between a member bank and its
directors.
Section 616. Rules Regarding Capital Levels of Holding Companies
This section clarifies that the Federal Reserve may adopt rules governing the capital levels of bank
and savings and loan holding companies. According to testimony provided to the Committee by John C.
Dugan, Comptroller of the Currency, under the current regulatory system, ―thrift holding companies,
unlike bank holding companies, are not subject to consolidated regulation for example, no consolidated
capital requirements apply at the holding company level. This difference between bank and thrift holding
company regulation created arbitrage opportunities for companies that were able to take on greater risk
under a less rigorous regulatory regime.‖ 161 This section provides the Federal Reserve with the same
authority to prescribe capital standards for savings and loan holding companies that it currently has for
bank holding companies. It is the intent of the Committee that in issuing regulations relating to capital
requirements of bank holding companies and savings and loan holding companies under this section, the
Federal Reserve should take into account the statutory accounting practices and procedures applicable to, and
capital structure of, holding companies that are insurance companies (including mutuals and fraternals), or
have subsidiaries that are insurance companies.
159 Strengthening and Streamlining Prudential Bank Supervision – Part I: Testimony of Daniel K. Tarullo, Member Board of Governors of the Federal Reserve
System, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 2nd session, p.13 (August 4, 2009).
160 Federal Financial Institutions Examination Council (2009), ―FFIEC Issues Statement on Regulatory Conversions, press release, July 1,
www.ffiec.gov/press/pr070109.htm.
161 Strengthening and Streamlining Prudential Bank Supervision – Part I: Testimony of John C. Dugan, Comptroller of the Currency, before the U.S. Senate
Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 2nd session, p.7 (August 4, 2009).
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This section also directs the AFBA for a bank or savings and loan holding company to require the
company to serve as a source of financial strength for any insured depository institution that the company
owns or controls. If an insured depository institution is not the subsidiary of a bank or savings and loan
holding company, the AFBA for the insured depository institution must require any company that owns or
controls the insured depository institution to serve as a source of financial strength for the institution. The
AFBA for such an insured depository institution may, from time to time, require the company, or a
company that directly or indirectly controls the depository to submit a report, under oath, for the purposes
of assessing the ability of the company to comply with the source of strength requirement, and for
purposes of enforcing the company‘s compliance with the source of strength requirement. It is the intent
of the Committee that such companies will be permitted to provide financial reporting to the AFBA
utilizing the accounting method they currently employ in reporting their financial information, such as the
statutory accounting principles (SAP) with which insurance companies must comply.
Section 617. Elimination of Elective Investment Bank Holding Company Framework
This section eliminates the elective Investment Bank Holding Company Framework in the
Securities Exchange Act of 1934. This repeals the current supervised investment bank holding company
program under which the Securities and Exchange Commission may supervise a non-bank securities firm
that is required by a foreign regulator to be subject to consolidated supervision by a U.S. regulator and
replaces this program with the supervisory regime described in section 618.
Section 618. Securities Holding Companies.
This section permits a securities holding company, not otherwise regulated by an AFBA, that is
required by a foreign regulator to be subject to comprehensive consolidated supervision to register with
the Federal Reserve to become a ―supervised securities holding company.‖ To qualify, a securities
holding company must own or control one or more brokers or dealers registered with the Securities and
Exchange Commission, and cannot be a nonbank financial company supervised by the Board, an affiliate
of an insured bank or savings association, a foreign bank, or subject to comprehensive consolidated
supervision by a foreign regulator. This section describes the manner in which the Board must supervise
and regulate ―supervised securities holding companies,‖ including through issuance of regulations that
prescribe capital adequacy and other risk management standards to protect the safety and soundness of the
company and to address risks posed to financial stability by such companies.
Section 619. Restrictions on Capital Market Activity by Banks and Bank Holding Companies
The intent of this section is to prohibit or restrict certain types of financial activity -- in banks,
bank holding companies, other companies that control an insured depository institution, their subsidiaries,
or nonbank financial companies supervised by the Board of Governors – that are high-risk or which create
significant conflicts of interest between these institutions and their customers. The prohibitions and
restrictions are intended to limit threats to the safety and soundness of the institutions, to limit threats to
financial stability, and eliminate any economic subsidy to high-risk activities that is provided by access to
lower-cost capital because of participation in the regulatory safety net.
Subject to recommendations and modifications by the Financial Stability Oversight Council, an
insured depository institution, a company that controls an insured depository institution or is treated as a
bank holding company for purposes of the Bank Holding Company Act, and any subsidiary of such
institution or company, will be prohibited from proprietary trading, sponsoring and investing in hedge
funds and private equity funds, and from having certain financial relationships with those hedge funds or
private equity funds for which they serve as investment manager or investment adviser. A nonbank
financial institution supervised by the Board of Governors that engages in proprietary trading, or
sponsoring or investing in hedge funds and private equity funds will be subject to Board rules imposing
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capital requirements relate to, or quantitative limits on, these activities. These prohibitions and
restrictions will be subject to certain exemptions.
The Council recommendations and modifications will be included in a study to assess the extent to
which the prohibitions, limitations and requirements of section 619 will promote several goals, including:
the safety and soundness of depositories and their affiliates; protecting taxpayers from loss; limiting the
inappropriate transfer of economic subsidies from institutions that benefit from deposit insurance and
liquidity facilities of the Federal government to unregulated entities; reducing inappropriate conflicts of
interest between depositories and their affiliates, or financial companies supervised by the Board of
Governors, and their customers; affecting the cost of credit or other financial services, limiting undue risk
or loss in financial institutions; and appropriately accommodating the business of insurance within
insurance companies subject to State insurance company investment laws.
The Council study is included to assure that the prohibitions included in section 619 work
effectively. It is not the intent of the section to interfere inadvertently with longstanding, traditional
banking activities that do not produce high levels of risk or significant conflicts of interest. For that
reason the Council is given some latitude to make needed modifications to definitions and provisions in
order to prevent undesired outcomes. However, it is intended that the Council will determine how to
effectively implement the prohibitions and restrictions of the section, and not to weaken them.
The Council will have six months to write the study, and the appropriate Federal bank agencies
will have nine months in which to issue regulations that reflect the recommendations of the Council.
Paul Volcker, chairman of the President‘s Economic Recovery Advisory Board and former
chairman of Board of Governors of the Federal Reserve, has strongly advocated that beneficiaries of the
federal financial safety net be prohibited from engaging in high-risk activities. In the statement he
submitted to the Senate Committee on Banking, Housing and Urban Affairs on February 2, Mr. Volcker
argued that there is no public policy rationale for subsidizing high risk activities:
―The basic point is that there has been, and remains, a strong public interest in providing a ―safety
net‖ – in particular, deposit insurance and the provision of liquidity in emergencies – for
commercial banks carrying out essential services. There is not, however, a similar rationale for
public funds - taxpayer funds - protecting and supporting essentially proprietary and speculative
activities. Hedge funds, private equity funds, and trading activities unrelated to customer needs
and continuing banking relationships should stand on their own, without the subsidies implied by
public support for depository institutions.‖
He also went on to note that these high-risk activities produce unacceptable conflicts of interest in insured
and regulated institutions:
―…I want to note the strong conflicts of interest inherent in the participation of commercial banking
organizations in proprietary or private investment activity. That is especially evident for banks
conducting substantial investment management activities, in which they are acting explicitly or
implicitly in a fiduciary capacity. When the bank itself is a ―customer‖, i.e., it is trading for its own
account, it will almost inevitably find itself, consciously or inadvertently, acting at cross purposes to
the interests of an unrelated commercial customer of a bank. ―Inside‖ hedge funds and equity funds
with outside partners may generate generous fees for the bank without the test of market pricing, and
those same ―inside‖ funds may be favored over outside competition in placing funds for clients. More
generally, proprietary trading activity should not be able to profit from knowledge of customer trades.‖
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At the same hearing Deputy Treasury Secretary Neal Wolin emphasized the volatility and
riskiness of the activities that are prohibited under section 619. In his statement he noted that:
―Major firms saw their hedge funds and proprietary trading operations suffer large losses in the
financial crisis. Some of these firms ―bailed out‖ their troubled hedge funds, depleting the firm‘s
capital at precisely the moment it was needed most. The complexity of owning such entities has
also made it more difficult for the market, investors, and regulators to understand risks in major
financial firms, and for their managers to mitigate such risks. Exposing the taxpayer to potential
risks from these activities is ill-advised.‖
Section 620. Concentration Limits on Large Financial Firms
Subject to recommendations from the Financial Stability Oversight Council, a financial company
may not merge or consolidate with, acquire all or substantially all of the assets of, or otherwise acquire
control of, another company, if the total consolidated liabilities of the acquiring financial company upon
consummation of the transaction would exceed 10 percent of the aggregate consolidated liabilities of all
financial companies at the end of the calendar year preceding the transaction.
The Council recommendations will be included in a study of the extent to which the concentration
limit under section 620 would affect financial stability, moral hazard in the financial system, the
efficiency and competitiveness of United States financial firms and financial markets, and the cost and
availability of credit and other financial services to households and businesses in the United States. The
intent is to have the Council determine how to effectively implement the concentration limit, and not
whether to do so.
The Council will have six months to write the study, and the Board of Governors of the Federal
Reserve will have nine months in which to issue regulations that reflect the recommendations and
modifications of the Council.
Section 701. Short Title
Title VII—Over-the-Counter Derivatives Markets Act of 2009
Section 701. Findings and Purposes
This section describes the findings and purposes of the Over-the-Counter Derivatives Markets Act of
2009. In order to mitigate costs and risks to taxpayers and the financial system, this Act establishes
regulations for the over-the-counter derivatives market including requirements for clearing, exchange
trading, capital, margin, and reporting.
Subtitle A — Regulation of Swap Markets
Section 711. Definitions
This section adds new definitions to the Commodity Exchange Act and directs the
Commodity Futures Trading Commission (―CFTC‖) and Securities and Exchange Commission
(―SEC‖) to jointly adopt uniform interpretations. The defined terms include ―swap,‖ ―swap dealer,‖ ―swap
repository,‖ and ―major swap participant.‖
This section also establishes guidelines for joint CFTC and SEC rulemaking authority under this Act. This
section requires that rules and regulations prescribed jointly under this Act by the CFTC and SEC shall be
uniform and shall treat functionally or economically equivalent products similarly. This section authorizes
the CFTC and SEC to prescribe rules defining ―swap‖ and ―security-based swap‖ to prevent evasions of
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this Act. This section also requires the CFTC and SEC to prescribe joint rules in a timely manner and
authorizes the Financial Stability Oversight Council to resolve disputes if the CFTC and SEC fail to
jointly prescribe rules.
Section 712. Jurisdiction
This section removes limitations on the CFTC‘s jurisdiction with respect to certain derivatives
transactions, including swap transactions between ―eligible contract participants.‖
Section 713. Clearing
Subsection (a). Clearing Requirement
This subsection requires clearing of all swaps that are accepted for clearing by a registered derivatives
clearing organization unless one of the parties to the swap qualifies for an exemption. This subsection
requires cleared swaps that are accepted for trading to be executed on a designated contract market or on a
registered alternative swap execution facility. The CFTC may exempt a party to a swap from the clearing
and exchange trading requirement if one of the counterparties to the swap is not a swap dealer or major
swap participant and does not meet the eligibility requirements of any derivatives clearing organization
that clears the swap. The CFTC must consult the Financial Stability Oversight Council before issuing an
exemption. Requires a party to a swap to submit the swap for clearing if a counterparty requests that the
such swap be cleared and the swap is accepted for clearing by a registered derivatives clearing
organization.
This subsection requires derivatives clearing organizations to seek approval from the CFTC prior to
clearing any group or category of swaps and directs the CFTC and SEC to jointly adopt rules to further
identify any group or category of swaps acceptable for clearing based on specified criteria; authorizes the
CFTC and SEC jointly to prescribe rules or issue interpretations as necessary to prevent evasions of
section 2(j) of the Commodity Exchange Act; and requires parties who enter into non- cleared swaps to
report such transactions to a swap repository or the CFTC.
Subsection (b). Derivatives Clearing Organizations
This subsection requires derivatives clearing organizations that clear swaps to register with the CFTC, and
directs the CFTC and SEC (in consultation with the appropriate federal banking agencies) to jointly adopt
uniform rules governing entities registered as derivatives clearing organizations for swaps under this
subsection and entities registered as clearing agencies for security-based swaps under the Securities
Exchange Act of 1934 (―Exchange Act‖). This subsection also permits dual registration of a derivatives
clearing organization with the CFTC and SEC or appropriate banking agency, authorizes the CFTC to
exempt from registration under this subsection a derivatives clearing organization that is subject to
comparable, comprehensive supervision and regulation on a consolidated basis by another regulator, and
provides transition for existing clearing agencies. This subsection specifies core regulatory principles for
derivatives clearing organizations, including standards for minimum financial resources, participant and
product eligibility, risk management, settlement procedures, safety of member or participant funds and
assets, rules and procedures for defaults, rule enforcement, system safeguards, reporting, recordkeeping,
disclosure, information sharing, antitrust considerations, governance arrangements, conflict of interest
mitigation, board composition, and legal risk. This subsection also requires a derivatives clearing
organization to provide the CFTC with all information necessary for the CFTC to perform its
responsibilities.
Subsection (c). Legal Certainty for Identified Banking Products
This subsection clarifies that the Federal banking agencies, rather than the CFTC or SEC, retain
regulatory authority with respect to identified banking products, unless a Federal banking agency, in
consultation with the CFTC and SEC, determines that a product has been structured as an identified
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anking product for the purpose of evading the provisions of the Commodity Exchange Act, Securities
Act of 1933, or Exchange Act.
Section 714. Public Reporting of Aggregate Swap Data
This section directs the CFTC (or a derivatives clearing organization or swap repository designated by the
CFTC) to make available to the public, in a manner that does not disclose the business transactions or
market positions of any person, aggregate data on swap trading volumes and positions.
Section 715. Swap Repositories
This section describes the duties of a swap repository as accepting, maintaining, and making available
swap data as prescribed by the CFTC; makes registration with the CFTC voluntary for swap repositories;
and subjects registered swap repositories to CFTC inspection and examination. This section also directs
the CFTC and SEC to jointly adopt uniform rules governing entities that register with the CFTC as swap
repositories and entities that register with the SEC as security-based swap repositories, and authorizes the
CFTC to exempt from registration any swap repository subject to comparable, comprehensive supervision
or regulation by another regulator.
Section 716. Reporting and Recordkeeping
This section requires reporting and recordkeeping by any person who enters into a swap that is not cleared
through a registered derivatives clearing organization or reported to a swap repository.
Section 717. Registration and Regulation of Swap Dealers and Major Swap Participants
This section requires swap dealers and major swap participants to register with the CFTC, directs the
CFTC and SEC to jointly adopt rules to mitigate conflicts, and directs the CFTC and SEC to jointly
prescribe uniform rules for entities that register with the CFTC as swap dealers or major swap participants
and entities that register with the SEC as security-based swap dealers or major security-based swap
participants. This section also requires a registered swap dealer or major swap participant to (1) meet such
minimum capital and margin requirements as the primary financial regulatory agency (for banks) or
CFTC and SEC (for nonbanks) shall jointly prescribe; (2) meet reporting and recordkeeping requirements;
(3) conform with business conduct standards; (4) conform with documentation and back office standards;
and (5) comply with requirements relating to position limits, disclosure, conflicts of interest, and antitrust
considerations. The Commission may exempt swap dealers and major swap participants from the margin
requirement according to certain criteria and pursuant to consultation with the Financial Stability
Oversight Council. If a party requests margin for an exempt swap, the exemption shall not apply.
Regulators may permit the use of non-cash collateral to meet margin requirements.
Section 718. Segregation of Assets Held as Collateral in Swap Transactions
For cleared swaps, this section requires that swap dealers, futures commission merchants, and derivatives
clearing organizations segregate funds held to margin, guarantee, or secure the obligations of a
counterparty under a cleared swap in a manner that protects their property. In addition, counterparties to
an un-cleared swap will be able to request that any margin posted in the transaction be held by an
independent third party custodian. Assets must be segregated on a non-discriminatory bases and may not
be re-hypothecated.
Section 719. Conflicts of Interest
This section also directs the CFTC to require futures commission merchants and introducing brokers to
implement conflict-of-interest systems and procedures relating to research activities and trading.
Section 720. Alternative Swap Execution Facilities
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This section defines alternative swap execution facility and requires a facility for the trading of swaps to
register with the CFTC as an alternative swap execution facility (―ASEF‖), subject to certain criteria
relating to deterrence of abuses, trading procedures, and financial integrity of transactions. This section
also establishes core regulatory principles for ASEFs relating to enforcement, anti-manipulation,
monitoring, information collection and disclosure, position limits, emergency powers, recordkeeping and
reporting, antitrust considerations, and conflicts of interest. This section directs the CFTC and SEC to
jointly prescribe rules governing the regulation of alternative swap execution facilities, and authorizes the
CFTC to exempt from registration under this section an alternative swap execution facility that is subject
to comparable, comprehensive supervision and regulation by another regulator.
Section 721. Derivatives Transaction Execution Facilities and Exempt Boards of Trade
This section repeals the existing provisions of the Commodity Exchange Act relating to derivatives
transaction execution facilities and exempt boards of trade.
Section 722. Designated Contract Markets
This section requires a board of trade, in order to maintain designation as a contract market, to
demonstrate that it provides a competitive, open, and efficient market for trading; has adequate financial,
operational, and managerial resources; and has established robust system safeguards to help ensure
resiliency.
Section 723. Margin
This section authorizes the CFTC to set margin levels for registered entities.
Section 724. Position Limits
This section authorizes the CFTC to establish aggregate position limits across commodity contracts listed
by designated contract markets, commodity contracts traded on a foreign board of trade that provides
participants located in the United States with direct access to its electronic trading and order matching
system, and swap contracts that perform or affect a significant price discovery function with respect to
regulated markets.
Section 725. Enhanced Authority over Registered Entities
This section enhances the CFTC‘s authority to establish mechanisms for complying with regulatory
principles and to review and approve new contracts and rules for registered entities.
Section 726. Foreign Boards of Trade
This section authorizes the CFTC to adopt rules and regulations requiring registration by, and prescribing
registration requirements and procedures for, a foreign board of trade that provides members or other
participants located in the United States direct access to the foreign board of trade‘s electronic trading and
order matching system. This section also prohibits foreign boards of trade from providing members or
other participants located in the United States with direct access to the electronic trading and order
matching systems of the foreign board of trade with respect to a contract that settles against the price of a
contract listed for trading on a CFTC-registered entity unless the foreign board of trade meets, in the
CFTC‘s determination, certain standards of comparability to the requirements applicable to U.S. boards of
trade. This section also provides legal certainty for certain contracts traded on or through a foreign board
of trade.
Section 727. Legal Certainty for Swaps
This section clarifies that no hybrid instrument sold to any investor and no transaction between eligible
contract participants shall be void based solely on the failure of the instrument or transaction to comply
with statutory or regulatory terms, conditions, or definitions.
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Section 728. FDICIA Amendments
Makes conforming amendments to the Federal Deposit Insurance Corporation Improvement Act
of 1991 (―FDICIA‖) to reflect that the definition of ―over-the- counter derivative instrument‖ under
FDICIA no longer includes swaps or security-based swaps.
Section 729. Primary Enforcement Authority
This section clarifies that the CFTC shall have primary enforcement authority for all provisions of
Subtitle A of this Act, other than new Section 4s(e) of the Commodity Exchange Act (as added by Section
717 of this Act, relating to capital and margin requirements for swap dealers and major swap participants),
for which the primary financial regulatory agency shall have exclusive enforcement authority with respect
to banks and branches or agencies of foreign banks that are swap dealers or major swap participants. This
section also provides the primary financial regulatory agency with backstop enforcement authority with
respect to the nonprudential requirements of the new Section 4s of the Commodity Exchange Act (relating
to registration and regulation of swap dealers and major swap participants) if the CFTC does not initiate
an enforcement proceeding within 90 days of a written recommendation by the primary financial
regulatory agency.
Section 730. Enforcement
This section clarifies the enforcement authority of the CFTC with respect to swaps and swap repositories,
and of the primary financial regulatory agency with respect to swaps, swap dealers, major
swap participants, swap repositories, alternative swap execution facilities, and derivatives
clearing organizations.
Section 731. Retail Commodity Transactions
This section clarifies CFTC jurisdiction with respect to certain retail commodity
transactions.
Section 732. Large Swap Trader Reporting
This section requires reporting and recordkeeping with respect to large swap positions in the regulated
markets.
Section 733. Other Authority
This section clarifies that this title, unless otherwise provided by its terms, does not divest any appropriate
federal banking agency, the CFTC, the SEC, or other federal or state agency of any authority derived from
any other applicable law.
Section 734. Antitrust
This section clarifies that nothing in this title shall be construed to modify, impair, or supersede antitrust
law.
Subtitle B — Regulation of Security-Based Swap Markets
Section 751. Definitions Under the Securities Exchange Act of 1934
This section adds new definitions to the Securities Exchange Act of 1934 and directs the CFTC and SEC
to jointly adopt uniform interpretations. The defined terms include ―security-based swap,‖ ―security-based
swap dealer,‖ ―security-based swap repository,‖ ―mixed swap,‖ and ―major security-based swap
participant.‖
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This section also establishes guidelines for joint CFTC and SEC rulemaking authority under this Act. This
section requires that rules and regulations prescribed jointly under this Act by the CFTC and SEC shall be
uniform and shall treat functionally or economically equivalent products similarly. This section authorizes
the CFTC and SEC to prescribe rules defining ―swap‖ and ―security-based swap‖ to prevent evasions of
this Act. This section also requires the CFTC and SEC to prescribe joint rules in a timely manner and
authorizes the Financial Stability Oversight Council to resolve disputes if the CFTC and SEC fail to
jointly prescribe rules.
Section 752. Repeal of Prohibition on Regulation of Security-Based Swaps
This section repeals provisions enacted as part of the Gramm-Leach-Bliley Act and the Commodity
Futures Modernization Act that prohibit the SEC from regulating security-based swaps.
Section 753. Amendments to the Securities Exchange Act of 1934
Subsection (a). Clearing for Security-Based Swaps
This subsection requires clearing of all security-based swaps that are accepted for clearing by a registered
clearing agency unless one of the parties to the swap qualifies for an exemption. This subsection requires
cleared security-based swaps that are accepted for trading to be executed on a registered national
securities exchange or on a registered alternative swap execution facility. The SEC may exempt a
security-based swap from the clearing and exchange trading requirement if one of the counterparties to
the swap is not a security-based swap dealer or major swap participant and does not meet the eligibility
requirements of any clearing agency that clears the swap. The SEC must consult the Financial Stability
Oversight Council before issuing an exemption. Requires a party to a security-based swap to submit the
swap for clearing if a counterparty requests that the swap be cleared and the swap is accepted for clearing
by a registered clearing agency.
This subsection requires clearing agencies to seek approval from the SEC prior to clearing any group or
category of security-based swaps and directs the CFTC and SEC to jointly adopt rules to further identify
any group or category of security-based swaps acceptable for clearing based on specified criteria;
authorizes the CFTC and SEC jointly to prescribe rules or issue interpretations as necessary to prevent
evasions of section 3A of the Exchange Act; requires parties who enter into non-cleared swaps to report
such transactions to a swap repository or the CFTC; and directs the SEC and CFTC to jointly adopt
uniform rules governing entities registered with the CFTC as derivatives clearing organizations for swaps
and with the SEC as clearing agencies for security-based swaps.
Subsection (b). Alternative Swap Execution Facilities
This subsection defines alternative swap execution facility and requires facilities for the trading of
security-based swaps to register with the SEC as ASEFs, subject to certain criteria relating to deterrence
of abuses, trading procedures, and financial integrity of transactions. This subsection also establishes core
regulatory principles for ASEFs relating to enforcement, anti-manipulation, monitoring, information
collection and disclosure, position limits, emergency powers, recordkeeping and reporting, antitrust
considerations, and conflicts of interest. This subsection directs the SEC and CFTC to jointly prescribe
rules governing the regulation of alternative swap execution facilities, and authorizes the SEC to exempt
from registration under this subsection an alternative swap execution facility that is subject to comparable,
comprehensive supervision and regulation by another regulator.
Subsection (c). Trading in Security-Based Swap Agreements
This subsection prohibits parties who are not eligible contract participants (as defined in
the Commodity Exchange Act) from effecting security-based swap transactions off of a registered
national securities exchange.
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Subsection (d). Registration and Regulation of Swap Dealers and Major Swap Participants
This subsection requires security-based swap dealers and major security-based swap participants to
register with the SEC, and directs the SEC and CFTC to jointly prescribe uniform rules for entities that
register with the SEC as security-based swap dealers or major security-based swap participants and
entities that register with the CFTC as swap dealers or major swap participants. This subsection also
requires security-based swap dealers and major security-based swap participants to (1) meet such
minimum capital and margin requirements as the primary financial regulatory agency (for banks) or
CFTC and SEC (for nonbanks) shall jointly prescribe; (2) meet reporting and recordkeeping requirements;
(3) conform with business conduct standards; (4) conform with documentation and back office standards;
and (5) comply with requirements relating to position limits, disclosure, conflicts of interest, and antitrust
considerations. The Commission may exempt security-based swap dealers and major swap participants
from the margin requirement according to certain criteria and pursuant consultation with the Financial
Stability Oversight Council. If a party requests margin for an exempt swap, the exemption shall not apply.
Regulators may permit the use of non-cash collateral to meet margin requirements.
Subsection (e). Additions of Security-Based Swaps to Certain Enforcement Provisions
This subsection adds security-based swaps to the Exchange Act‘s list of financial
instruments that a person may not use to manipulate security prices.
Subsection (f). Rulemaking Authority to Prevent Fraud, Manipulation, and Deceptive Conduct in
Security-Based Swaps
This subsection prohibits fraudulent, manipulative, and deceptive acts involving security-based swaps and
security-based swap agreements, and directs the SEC to prescribe rules and regulations to define and
prevent such conduct.
Subsection (g). Position Limits and Position Accountability for Security-Based Swaps and Large Trader
Reporting
As a means to prevent fraud and manipulation, this subsection authorizes the SEC to (1) establish limits
on the aggregate number or amount of positions that any person or persons may hold across securitybased
swaps that perform or affect a significant price discovery function with respect to regulated
markets; (2) exempt from such limits any person, class of persons, transaction, or class of transactions;
and (3) direct a self-regulatory organization to adopt rules relating to position limits for security-based
swaps. This subsection also requires reporting and recordkeeping with respect to large security-based
swap positions in regulated markets.
Subsection (h). Public Reporting and Repositories for Security-Based Swap Agreements
This subsection requires the SEC or its designee to make available to the public, in a manner that does not
disclose the business transactions and market positions of any person, aggregate data on security-based
swap trading volumes and positions. This subsection also describes the duties of a security-based swap
repository as accepting and maintaining security-based swap data as prescribed by the SEC, makes SEC
registration for security-based swap repositories voluntary, and subjects registered security-based swap
repositories to SEC inspection and examination. This subsection directs the SEC and CFTC to jointly
adopt uniform rules governing entities that register with the SEC as security-based swap repositories and
entities that register with the CFTC as swap repositories and authorizes the SEC to exempt from
registration any security-based swap repository subject to comparable, comprehensive supervision or
regulation by another regulator.
Section 754. Segregation of Assets Held as Collateral in Security-Based Swap Transactions
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For cleared swaps, this section requires that security-based swap dealers or clearing agencies segregate
funds held to margin, guarantee, or secure the obligations of a counterparty in a manner that protects their
property. In addition, counterparties to an un-cleared swap will be able to request that any margin posted
in the transaction be held by an independent third party custodian. Assets must be segregated on a nondiscriminatory
bases and may not be re-hypothecated.
Section 755. Reporting and Recordkeeping
This section requires reporting and recordkeeping by any person who enters into a
security-based swap that is not cleared with a registered clearing agency or reported to a
security-based swap repository. This section also includes security-based swaps within the scope of
certain reporting requirements under Sections 13 and 16 of the Exchange Act.
Section 756. State Gaming and Bucket Shop Laws
This section clarifies the applicability of certain state laws to security-based swaps.
Section 757. Amendments to the Securities Act of 1933; Treatment of Security-Based Swaps
This section amends the Securities Act of 1933 to include security-based swaps within the definition of
―security.‖ This section also amends Section 5 of the Securities Act of 1933 to prohibit offers to sell or
purchase a security-based swap without an effective registration statement to any person other than an
eligible contract participant (as defined in the Commodity Exchange Act).
Section 758. Other Authority
This section clarifies that this title, unless otherwise provided by its terms, does not divest any appropriate
federal banking agency, the SEC, the CFTC, or other federal or state agency of any authority derived from
any other applicable law.
Section 758. Jurisdiction
This section clarifies that the SEC shall not have authority to grant exemptions from the provisions of this
Act, except as expressly authorized by this Act; provides the SEC with express authorization to use any
authority granted under subsection (a) to exempt any person or transaction from any provision of this title
that applies to such person or transaction solely because a security-based swap is a security under section
3(a).
Subtitle C — Other Provisions
Section 761. International Harmonization
This section requires regulators to consult and coordinate with international authorities on the
establishment of consistent standards for the regulation of swaps and security-based swaps.
Section 762. Interagency Cooperation
This section establishes a SEC-CFTC Joint Advisory Committee to monitor and develop solutions
emerging in the swaps and security-based swaps markets, a SEC-CFTC Joint Enforcement Task Force to
improve market oversight, a SEC-CFTC-Federal Reserve Trading and Markets Fellowship Program to
provide cross-training among agency staff about the interaction between financial markets activity and the
real economy, SEC-CFTC cross-agency enforcement training and education, and detailing of staff
between the SEC and CFTC.
Section 763. Study and Report on Implementation
This section requires the GAO to conduct on study on the implementation of this Act within one
year of the date of enactment.
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Section 764. Recommendations for Changes to Insolvency Laws
This section requires the SEC, CFTC, and FIRA to make recommendations to Congress within
180 days of enactment regarding Federal insolvency laws and their impact on various swaps and securitybased
swaps activity.
Section 765. Effective Date
This section specifies that this title shall become effective 180 days after the date of enactment.
Title VIII – Payment, Clearing, and Settlement Supervision Act of 2009
Section 801. Short Title
Section 802. Findings and Purposes
This section describes the findings and purposes of the Payment, Clearing, and Settlement Supervision
Act of 2009. In order to mitigate systemic risk in the financial system and promote financial stability, this
Act provides the Financial Stability Oversight Council a role in identifying systemically important
financial market utilities and the Board of Governors of the Federal Reserve System (―Board‖) with an
enhanced role in supervising risk management standards for systemically important financial market
utilities and for systemically important payment, clearing, and settlement activities conducted by financial
institutions.
Section 803. Definitions
Section 804. Designation of Systemic Importance
This section authorizes the Financial Stability Oversight Council to designate financial market utilities or
payment, clearing, or settlement activities as systemically important, and establishes procedures and
criteria for making and rescinding such a designation. Criteria for designation and rescission of
designation include the aggregate monetary value of transactions processed and the effect that a failure of
a financial market utility or payment, clearing, or settlement activity would have on counterparties and the
financial system.
Section 805. Standards for Systemically Important Financial Market Utilities and Payment,
Clearing, or Settlement Activities
This section authorizes the Board, in consultation with the Financial Stability Oversight Council and the
appropriate supervisory agencies, to prescribe risk management standards governing the operations of
designated financial market utilities and the conduct of designated payment, clearing, and settlement
activities by financial institutions. This section also establishes the objectives, principles, and scope of
such standards.
Section 806. Operations of Designated Financial Market Utilities
This section authorizes a Federal Reserve bank to establish and maintain an account for a designated
financial market utility and allows the Board to modify or provide an exemption from reserve
requirements that would otherwise be applicable to the designated financial market utility. This section
requires a designated financial market utility to provide advance notice of and obtain approval of material
changes to its rules, procedures, or operations.
Section 807. Examination and Enforcement Actions Against Designated Financial Market Utilities
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This section requires the supervisory agency to conduct safety and soundness examinations of a
designated financial market utility at least annually and authorizes the supervisory agency to take
enforcement actions against the utility. This section also allows the Board to participate in examinations
by, and make recommendations to, other supervisors and designates the Board as the supervisory agency
for designated financial market utilities that do not otherwise have a supervisory agency. The Board is
also authorized to take enforcement actions against a designated financial market utility if there is an
imminent risk of substantial harm to financial institutions or the broader financial system.
Section 808. Examination and Enforcement Actions Against Financial Institutions Engaged in
Designated Activities
This section authorizes the primary financial regulatory agency to examine a financial institution engaged
in designated payment, clearing, or settlement activities and to enforce the provisions of this Act and the
rules prescribed by the Board against such an institution. This section also requires the Board to
collaborate with the primary financial regulatory agency to ensure consistent application of the Board‘s
rules. The Board is granted back-up authority to conduct examinations and take enforcement actions if it
has reasonable cause to believe a violation of its rules or of this Act has occurred.
Section 809. Requests for Information, Reports, or Records
This section authorizes the Financial Stability Oversight Council to collect information from financial
market utilities and financial institutions engaged in payment, clearing, or settlement activities in order to
assess systemic importance. Upon a designation by the Financial Stability Oversight Council, the Board
may require submission of reports or data by systemically important financial market utilities or financial
institutions engaged in activities designated to be systemically important. This section also facilitates
sharing of relevant information and coordination among financial regulators, with protections for
confidential information.
Section 810. Rulemaking
This section authorizes the Board and the Financial Stability Oversight Council to prescribe such rules
and issue such orders as may be necessary to administer and carry out the purposes of this title and
prevent evasions thereof.
Section 811. Other Authority
This section clarifies that this Act, unless otherwise provided by its terms, does not divest any appropriate
financial regulatory agency, supervisory agency, or other Federal or State agency of any authority derived
from any other applicable law.
Section 812. Effective Date
This section specifies that this Act shall be effective as of the date of enactment.
Title IX – Investor Protections
Subtitle A
Section 911. Investor Advisory Committee Established
Section 911 establishes within the SEC the Investor Advisory Committee to assist the SEC by
advising and consulting on regulatory priorities; issues relating to securities, trading, fee structures and
the effectiveness of disclosures; investor protection; and initiatives to promote investor confidence. The
Committee shall be composed of the Investor Advocate, a representative of state securities commissions
because of the important work that States have performed in protecting investors, a representative of the
interests of senior citizens who are sometimes targeted for securities frauds, and between 12 and 22
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members who represent the interests of individual investors, institutional investors, and pension fund
investors.
The Committee shall elect from among themselves a Chairman, Vice Chairman, Secretary, and
Assistant Secretary, each of whom shall serve a 3 year term. The Committee shall meet at least twice per
year. The SEC shall provide the Committee with the staff necessary to fulfill its mission. The SEC must
publicly respond to Committee findings and recommendations by assessing them and disclosing any
action the SEC intends to take. It is expected that the responses will be made shortly after the Committee
acts.
In June of 2009, the SEC formed an Investor Advisory Committee. This legislation gives the
Investor Advisory Committee a statutory foundation and sets congressional prerogatives for the
Committee‘s composition and function.
The proposal for this Committee was included in the Treasury Department legislative proposal for
financial reform. 162 AARP supports the statutory establishment of this Committee. On November 19,
2009, the AARP wrote in a letter to Senators Dodd and Shelby, ―AARP also supports additional powers
granted to the SEC to strengthen its work on behalf of investors, including explicit authority to establish
an Investor Advisory Committee.‖ 163
Section 912. Clarification of Authority of the Commission to Engage in Consumer Testing
Section 912 clarifies the SEC‘s authority to gather information from and communicate with
investors and engage in such temporary programs as the SEC determines are in the public interest for the
purpose of evaluating any rule or program of the SEC.
In the past, the SEC has carried out consumer testing programs, but there have been questions of
the legality of this practice. This legislative language gives clear authority to the SEC for these activities.
This proposal is included in the Treasury Department‘s legislative language for financial
reform 164 . The AARP told the Committee that it ―supports the explicit authority granted to the SEC to test
rules or programs by gathering information and communicating with investors and other members of the
public. This type of testing has the very real potential to improve the clarity and usefulness of the
disclosures that our securities regulatory scheme relies upon.‖ 165 Mr. James Hamilton, Principal Analyst,
CCH Federal Securities Law Reporter has said ―The SEC can better evaluate the effectiveness of investor
disclosures if it can meaningfully engage in consumer testing of those disclosures. The SEC should be
better enabled to engage in field testing, consumer outreach and testing of disclosures to individual
investors, including by providing budgetary support for those activities.‖ 166
Section 913. Study and Rulemaking Regarding Obligations of Brokers, Dealers, and Investment
Advisers
162 FACT SHEET: ADMINISTRATION‘S REGULATORY REFORM AGENDA MOVES FORWARD; Legislation for Strengthening Investor Protection
Delivered to Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 2009, www.financialstability.gov.
163 AARP, letter to Senators Dodd and Shelby, November 19, 2009.
164 FACT SHEET: ADMINISTRATION‘S REGULATORY REFORM AGENDA MOVES FORWARD; Legislation for Strengthening Investor Protection
Delivered to Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 2009, www.financialstability.gov.
165 AARP, letter to Senators Dodd and Shelby, November 19, 2009.
166 Obama Reform Proposal Would Enhance SEC Investor Protection Role, Jim Hamilton‘s World of Securities Regulation, jimhamiltonblog.blogspot.com,
June 17, 2009.
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Section 913 was authored by Senators Johnson and Crapo. It directs the SEC to conduct a study of
the effectiveness of existing legal or regulatory standards of care for brokers, dealers, and investment
advisers for providing personalized investment advice and recommendations about securities to retail
customers imposed by the SEC and FINRA, and whether there are legal or regulatory gaps or overlap in
legal or regulatory standards in the protection of retail customers. The section also requires the SEC to
issue a report within one year that considers public input. If this study identifies any gaps or overlap in the
legal or regulatory standards in the protection of retail customers relating to the standards of care for
brokers, dealers, and investment advisers, the SEC shall commence a rulemaking within two years to
address such regulatory gaps and overlap that can be addressed by rule, using its existing authority under
the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940.
This issue is significant and interested persons have strong views. The North American Securities
Administrators Association, 167 AARP, 168 Consumer Federation of America, 169 the CFA Institute, 170
Financial Planners Association, Investment Advisors Association, Fund Democracy, Investment
Company Institute, and National Association of Personal Financial Advisors support regulating brokerdealers
under the Investment Advisers Act. SEC Chairman Mary Schapiro, 171 and SIFMA 172 have
supported the harmonization of broker-dealer and investment adviser regulation. The Association of
Advanced Life Underwriting, the National Association of Insurance and Financial Advisors and National
Association of Independent Life Brokerage Agencies opposed legislative changes to the duty and
recommended a study of the situation.
The study in Section 913 will provide the opportunity to reexamine this issue and may provide a
basis for future regulatory actions.
Section 914. Creation of Office of the Investor Advocate
Section 914 was authored by Senator Akaka. Section 914 creates the Office of the Investor
Advocate within the Securities and Exchange Commission (SEC). The Committee believes it is
necessary to create an office of the Investor Advocate within the SEC to strengthen the institution and
ensure that the interests of retail investors are better represented. The Investor Advocate is tasked with
assisting retail investors resolve significant problems with the SEC or the self-regulatory organizations
(SROs). The Investor Advocate‘s mission includes identifying areas where investors would benefit from
changes in SEC or SRO policies and problems that investors have with financial service providers and
investment products. The Investor Advocate will recommend policy changes to the SEC and Congress in
the interests of investors. The Taxpayer Advocate within the Internal Revenue Service has contributed
significantly to the improvement of policies that have benefitted taxpayers. A similar office in the SEC
has a tremendous potential to similarly benefit retail investors. The Investor Advocate, with its
independent reporting lines, would help to ensure that the interests of retail investors are built into
rulemaking proposals from the outset and that agency priorities reflect the issues that confront average
investors. The Investor Advocate will increase transparency and accountability at the SEC and be
equipped to act in response to feedback from investors and potentially avoid situations such as the
mishandling of tips that could have exposed Ponzi schemes much earlier. The Investor Advocate, and
staff of the Office of the Investor Advocate, shall maintain the same level of confidentiality for any
167 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.12 (2009)(Testimony of Mr. Fred Joseph).
168 AARP, letter to Senators Dodd and Shelby, November 19, 2009.
169 Consumer Federation of America (November 10, 2009), ―CFA Applauds Introduction of Senator Dodd‘s Financial Reform Package,‖ Press release,
www.consumerfed.org.
170 CFA Institute (September 11, 2009), ―Investment Advisers Should Adhere to a Single, High Fiduciary Standard, Says CFA Institute,‖ Press Release,
www.cfainstitute.org.
171 Address to Financial Services Roundtable — 2009 Fall Conference, Chairman Mary Schapiro, speech, September 24, 2009.
172 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.6 (2009)(Testimony of Mr. Timothy Ryan).
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document or information made available under this section as is required of any member, officer, or
employee of the SEC. In this regard, the Investor Advocate and staff in the Office of the Investor
Advocate are subject to the same statutory and regulatory restrictions on, and applicable penalties for, the
unauthorized disclosure or use of any nonpublic information that apply to any member, officer, or
employee of the SEC.
Section 915. Streamlining of Filing Procedures for Self-Regulatory Organizations
Section 915 requires the SEC to approve a proposed SRO rule or institute a proceeding to consider
whether the rule should be disapproved within 45 days. The SEC can extend this period by 45 days if
appropriate. If the SEC does not approve the rule within this period then it must provide a hearing within
180 days of the rule proposal publication. The SEC must approve or disapprove the rule during this same
period, or it can extend this period by 60 days if necessary. If the SEC does not follow these time
restrictions, the rule is deemed to have been approved. The SEC has 7 days after the receipt of the
proposal to notify the SRO if the proposed rule change does not comply with the rules of the SEC relating
to the required form of a proposed rule change.
The Committee recognizes that in the modern securities markets it is important that the SEC
operate efficiently and responsively. The Committee has heard concerns about current SEC processes for
action on rule changes by exchanges and other self-regulatory organizations.
The Committee expects that the changes will encourage the SEC to employ a more transparent and
rapid process for consideration of rule changes.
Nothing in the Section diminishes the SEC‘s authority to reject an improperly filed rule,
disapprove a rule that is not consistent with the Exchange Act, or diminishes the applicable public notice
and comment period.
Nasdaq OMX, NYSE Euronext, International Securities Exchange and Chicago Board Options
Exchange have written jointly by letter dated November 24, 2009 in strong support of this provision
because ―it would streamline the Securities and Exchange Commission‘s (SEC) process for making a
determination on an exchange rule proposal.‖ They explained, ―As Self Regulatory Organizations
(SROs), we are subject to the regulatory authority of the SEC, which includes the requirement that we
submit all proposed rule changes to the SEC for approval. Although the SEC has made progress in
increasing the number of rule proposals that may be submitted for immediate effectiveness, the process
that rule proposals that are not subject to immediate effectiveness must undergo remains a point of
frustration for SROs. The current process enables the SEC to use internal interpretations to avoid what
should be reasonable timelines to move rule filings toward a determination of approval or denial. This
process not only delays transparency and public input, it provides a significant competitive advantage to
our less regulated competitors, which do not have to seek regulatory approval before changing their
rules.‖
Section 916. Study Regarding Financial Literacy Among Investors
Section 916 was authored by Senator Akaka. This Section directs the SEC to study and issue a
report on the existing level of financial literacy among retail investors. The SEC will have to develop an
investor financial literacy strategy. The strategy is intended to bring about positive behavioral change in
investors. The study will identify: (1) the existing level of financial literacy among retail investors; (2)
methods to improve the timing, content, and format of disclosures to investors with respect to financial
intermediaries, investment products, and investment services; (3) the most useful and understandable
relevant information that retail investors need to make informed financial decisions; (4) methods to
increase the transparency of expenses and conflicts of interests in transactions involving investment
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services and products; (5) the most effective existing private and public efforts to educate investors; and
(6) in consultation with the Financial Literacy and Education Commission, a strategy to increase the
financial literacy of investors in order to bring about a positive change in investor behavior.
The AARP also supported the study of financial literacy in a letter to Senators Dodd and
Shelby. 173
Section 917. Study Regarding Mutual Fund Advertising
Section 917 directs the GAO to conduct a study and issue a report on mutual fund advertising to
examine: (1) existing and proposed regulatory requirements for open-end investment company
advertisements; (2) current marketing practices for the sale of open-end investment company shares,
including the use of past performance data, funds that have merged, and incubator funds; (3) the impact of
such advertising on consumers; and (4) recommendations to improve investor protections in mutual fund
advertising and additional information necessary to ensure that investors can make informed financial
decisions when purchasing shares.
Section 918. Clarification of Commission Authority to Require Investor Disclosures
Before Purchase of Investment Products and Services
Section 918 was authored by Senator Akaka. Section 918 clarifies the SEC‘s authority to require
investor disclosures before the purchase of investment company shares. This section will give the SEC the
authority to require broker-dealers to disclose to clients their compensation for sales of open- and closedend
mutual funds. The Committee believes that investors must be provided with relevant, meaningful, and
timely disclosures about financial products and services from which they can make better informed
investment decisions.
Mr. James Hamilton, Principal Analyst, CCH Federal Securities Law Reporter said ―legislation
should authorize the SEC to require that certain disclosures (including a summary prospectus) be
provided to investors at or before the point of sale, if the SEC finds that such disclosures would improve
investor understanding of the particular financial products, and their costs and risks. Currently, most
prospectuses (including the mutual fund summary prospectus) are delivered with the confirmation of sale,
after the sale has taken place. Without slowing the pace of transactions in modem capital markets, the
SEC should require that adequate information is given to investor to make informed investment
decisions.‖ 174
Mr. Travis Plunkett, Legislative Director of the Consumer Federation of America, also supports
this provision. In testimony for the House Financial Services Committee, he wrote ―we also strongly
support requiring pre-sale disclosure to assist mutual fund investors to make more informed investment
decisions. While mutual funds are subject to more robust disclosure requirements than many competing
investment products and services, the disclosures typically do not arrive until three days after the sale.
This makes them essentially useless in helping investors to assess the risks and costs of the fund, as well
as the uses for which it may be most appropriate.‖ 175 AARP also supports this provision. 176 The
Committee encourages that Securities and Exchange Commission to use the consumer testing authorized
under Section 912 and the study on financial literacy under Section 916 to inform its scope of disclosures.
173 AARP, letter to Senators Dodd and Shelby, November 19, 2009.
174 Obama Administration Would Enhance SEC‘s Investor Protection Role, Mr. James Hamilton, CCH Financial Crisis Newsletter, June 18, 2009,
www.financialcrisisupdate.com.
175 Community and Consumer Advocates‘ Perspectives on the Obama Administration‘s Financial
Regulatory Reform Proposals: Testimony before the U.S. House Committee on Financial Services, 111 th Congress, 1 st session, p.24 (2009)(Testimony of Mr.
Travis Plunkett).
176 AARP, letter to Senators Dodd and Shelby, November 19, 2009.
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Section 919. Study on Conflicts of Interest
Section 919 directs the GAO to conduct a study and make recommendations regarding potential
conflicts of interest between securities underwriting and securities analysis functions within firms. In this
study, the GAO will consider potential harm to investors of these conflicts, the nature and benefit of the
undertakings to which the firms agreed as part of the Global Settlement, whether any of these
undertakings should be codified, and whether to recommend regulatory or legislative measures to mitigate
harm to investors caused by these conflicts of interest. The GAO will consult with the SEC, FINRA,
investor advocates, retail investors, institutional investors, academics, and State securities officials in
performing this study. This issue has been a subject of public concern for many years. On March 15,
2010, the U.S. District Court in New York rejected a proposal by the SEC and 12 securities firms to
change the legal settlement put in place with the Global Research Analyst Settlements to end abuses on
Wall Street that would have allowed employees in investment-banking and research departments at Wall
Street firms to "communicate with each other…outside of the presence" of lawyers or compliancedepartment
officials responsible for policing employee conduct—an activity strictly prohibited by the
settlement. The 2003 Global Settlement resolved a major securities scandal, in which 10 of the largest
securities firms and two individual analysts were charged with issuing misleading or fraudulent analyst
recommendations and fines of $1.4 billion were assessed.
Title V of the Sarbanes-Oxley Act of 2002 (P.L.107-204) addressed aspects of this issue by
amending the Securities Exchange Act of 1934 to require the SEC, or upon the authorization and direction
of the SEC, a registered securities association or national securities exchange, to adopt rules reasonably
designed to address conflicts of interest that can arise when securities analysts recommend equity
securities in research reports and public appearances.
Section 919A. Study on Improved Access to Information on Investment Advisers and Broker-
Dealers
Senator Brown (OH) authored Section 919A. This Section directs the SEC to study and make
recommendations on ways to improve the access of investors to registration information about registered
and previously registered investment advisers, associated persons of investment advisers, brokers and
dealers and their associated persons on the existing Central Registration Depository and Investment
Adviser Registration Depository systems, as well as identify additional information that should be made
publicly available.
Section 919B. Study on Financial Planners and the Use of Financial Designations
Senator Kohl authored Section 919B. This Section directs the GAO to conduct a study to evaluate
and make recommendations on the effectiveness of State and Federal regulations to protect consumers
from misleading financial advisor designations; current State and Federal oversight structure and
regulations for financial planners; and legal or regulatory gaps in the regulation of financial planners and
other individuals who provide or offer to provide financial planning services to consumers.
Senator Kohl has said that ―Financial planners provide advice on a wide range of issues, including
home ownership, saving for college and selecting appropriate investment products. Because this advice
will have a lasting impact on the financial health of the consumer, it is important that the service provider
meets certain standards. Currently, different states‘ laws govern financial planners, with no standard code
of conduct, training requirements or conflict of interest disclosure requirements. Additionally, there is
little accountability for financial planners that take advantage of consumers. Both consumers and financial
planners will benefit from standardizing rules and increased oversight at the federal level.‖ 177 Marilyn
177 Senator Kohl, letter to Senator Dodd, February 22, 2010.
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Mohrman-Gillis, Managing Director, Public Policy, Certified Financial Planner Board of Standards, Inc.
said ―we recognize that the study is certainly a first step in Congress recognizing the need for reform.‖
Subtitle B
Section 921. Authority to Issue Rules to Restrict Mandatory Predispute Arbitration
Section 921 gives the SEC the authority to conduct a rulemaking to prohibit, or impose conditions
or limitations on the use of, agreements that require customers or clients of any broker, dealer, or
municipal securities dealer to arbitrate any dispute between them. This provision was included in the
Treasury Department‘s legislative proposal. 178
There have been concerns over the past several years that mandatory pre-dispute arbitration is
unfair to the investors. In a letter to Chairman Dodd and Ranking Member Shelby, AARP expressed
support for this provision. In listing some of the problems with mandatory pre-dispute arbitration, the
letter identified ―high up-front costs; limited access to documents and other key information; limited
knowledge upon which to base the choice of arbitrator; the absence of a requirement that arbitrators
follow the law or issue written decisions; and extremely limited grounds for appeal.‖ 179
The North American Securities Administrators Association also supports this provision, stating in
testimony that a ―major step toward improving the integrity of the arbitration system is the removal of the
mandatory industry arbitrator. This mandatory industry arbitrator, with their industry ties, automatically
puts the investor at an unfair disadvantage.‖ 180 The Consumer Federation of America, 181 AARP, 182 and
the Public Investors Arbitration Bar Association support this approach. 183
Section 922. Whistleblower Protection
The Whistleblower Program, established and administered by the Securities and Exchange
Commission, is intended to provide monetary rewards to those who contribute ―original information‖ that
lead to recoveries of monetary sanctions of $1,000,000 or more in criminal and civil proceedings. The
genesis of the program is found in President Obama‘s June 2009 financial regulatory reform proposal. 184
SEC Chairwoman Mary Schapiro has been on the record advocating for a meaningful Whistleblower
Program since spring of 2009. 185 A similar provision was included in the House of Representatives
financial reform bill (H.R. 4173).
The Whistleblower Program aims to motivate those with inside knowledge to come forward and
assist the Government to identify and prosecute persons who have violated securities laws and recover
money for victims of financial fraud. In a testimony for the Senate Banking Committee, Certified Fraud
Examiner and Madoff whistleblower Harry Markopolos testified in support of creating a strong
Whistleblower Program. He cited statistics showing the efficiency of Whistleblower Programs:
178 FACT SHEET: ADMINISTRATION‘S REGULATORY REFORM AGENDA MOVES FORWARD; Legislation for Strengthening Investor Protection
Delivered to Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 2009, www.financialstability.gov.
179 AARP, letter to Senators Dodd and Shelby, November 19, 2009.
180 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.18 (2009)(Testimony of Mr. Fred Joseph).
181 Consumer Federation of America (November 10, 2009), ―CFA Applauds Introduction of Senator Dodd‘s Financial Reform Package,‖ Press release,
www.consumerfed.org.
182 AARP, letter to Senators Dodd and Shelby, November 19, 2009.
183 The following article references the Public Investors Arbitration Bar Association‘s support for this provision: ―Death Knell For Mandatory Arbitration,‖
Helen Kearney, On Wall Street, August 1, 2009.
184 Fact Sheet: Administration‘s Regulatory Reform Agenda Moves Forward; Legislation for Strengthening Investor Protection Delivered to Capitol Hill, U.S.
Department of the Treasury, Press Release, July 10, 2009. Available at http://www.financialstability.gov.
185 Schapiro, Mary, speech at the Society of American Business Writers and Editors April 27, 2009. Available
at: http://www.thestreet.com/story/10492573/1/sec-may-pay-whistleblowers.html Accessed on March 7, 2010. See also Chairman Mary Schapiro‘s testimony
before the House Appropriations Subcommittee on Financial Services, March 11, 2009.
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―whistleblower tips detected 54.1% of uncovered fraud schemes in public companies. External auditors,
and the SEC exam teams would certainly be considered external auditors, detected a mere 4.1% of
uncovered fraud schemes. Whistleblower tips were 13 times more effective than external audits, hence my
recommendation to the SEC to encourage the submission of whistleblower tips.‖ 186 In his letter to
Senator Dodd, SEC Inspector General David Kotz also recommended a similar Whistleblower
Program. 187
Recognizing that whistleblowers often face the difficult choice between telling the truth and the
risk of committing ―career suicide‖, the program provides for amply rewarding whistleblower(s), with
between 10% and 30% of any monetary sanctions that are collected based on the ―original information‖
offered by the whistleblower. The program is modeled after a successful IRS Whistleblower Program
enacted into law in 2006. The reformed IRS program, which, too, has a similar minimum-maximum
award levels and an appeals process 188 , is credited to have reinvigorated the earlier, largely ineffective,
IRS Whistleblower Program. The Committee feels the critical component of the Whistleblower Program
is the minimum payout that any individual could look towards in determining whether to take the
enormous risk of blowing the whistle in calling attention to fraud.
We also note a recent report of the current SEC insider-trading Whistleblower Program by the
Office of Inspector General of SEC. Since the inception of the program in 1989, there have been a total of
only seven payouts to five whistleblowers for a meager total of $159,537. 189 In the report, the Inspector
General recommends several important guidelines that any current or future SEC Whistleblower
Programs should follow, including: development of specific criteria for bounty awards (including a
provision to award whistleblowers that partly rely upon public information), development of tips and
complaints tracking systems, incorporating best practices from DOJ and IRS‘s Whistleblower Programs,
and establishment of a timeframe for the new policies.
―Original information‖ is defined as information that is derived from the independent analysis or
knowledge of the whistleblower, and is not derived from an allegation in court or government reports, and
is not exclusively from news media. In circumstances when bits and pieces of the whistleblower‘s
information were known to the media prior to the emergence of the whistleblower, and that for the
purposes of the SEC enforcement 190 the critical components of the information was supplied by the
whistleblower, the intent of the Committee is to require the SEC to reward such person(s) in accordance
with the degree of assistance that was provided. The rewards are to be from the Investor Protection Fund,
which receives funds from sanctions collected based on civil enforcement and from other funds within
SEC that are otherwise not distributed to investors (i.e., unused disgorgement funds). Whenever a
whistleblower or whistleblowers tip leads the SEC to collect sanctions and penalties that are determined
to be distributed to the victims of the fraud, the intent of the Committee is to reward the whistleblower
prior or at the same time as paying such victims, recognizing that were it not for the whistleblower‘s
actions, there would have been no discovery of the harm to the investors and no collection of any
sanctions for their benefit.
The SEC has discretion in determining the amount and whether or not a whistleblower is to be
awarded. In cases when whistleblowers feel that the SEC had abused its discretion in determining the
amount of the award, they have the right to appeal, within 30 days of the decision to a court of appeals.
186 ―Oversight of the SEC‘s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance: Testimony before the U.S. Senate
Committee on Banking, Housing, and Urban Affairs‖, 111 th Congress, 1 st session, p.33 (2009) (Testimony of Mr. Harry Markopolos).
187 Inspector General H.David Kotz, letter to Senator Dodd, October 29, 2009.
188 Like the IRS program, the new SEC Whistleblower Program provides for an appeals process, the appropriate court of appeals will review the determination
made by the Commission in accordance with section 706 of title 5 of US code (i.e., abuse of discretion).
189 ―Assessment of the SEC‘s Bounty Program‖, Office of Inspector General, U.S. Securities and Exchange Commission, Report No. 474. March 29, 2010.
190 Same would apply to cases when SEC forwards criminal cases to DOJ that lead to penalties and sanctions.
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The court is to review the determination in accordance with section 706 of title 5 of U.S. Code. The
Committee feels that this review process will significantly contribute to make the program reliable for
persons who are contemplating whether or not to blow the whistle on fraud. It will add to the notion of
enforceable payout. The Committee, having heard from several parties involved in whistleblower related
cases, has determined that enforceability and relatively predictable level of payout will go a long way to
motivate potential whistleblowers to come forward and help the Government identify and prosecute
fraudsters. Whistleblowers who are employees of an appropriate regulatory agency, DOJ, SROs, PCAOB,
accountants in certain circumstances, or a law enforcement organization are generally not eligible for an
award. Also not eligible are whistleblowers who are convicted of a criminal violation related to the case at
hand.
The Committee intends for this program to be used actively with ample rewards to promote the
integrity of the financial markets.
The program also requires the SEC to annually report back to Congress, among other things, with
details regarding the number and types of awards granted. It also provides for various protections for
whistleblowers, specifically barring employers to discharge, demote, suspend, threaten, harass directly or
indirectly, or in any other manner discriminate. The provision also makes it unlawful to knowingly and
willfully make any false, fictitious or fraudulent statement or representation, or use any false writing or
document knowing the writing or document contains any false, fictitious, or fraudulent statement or entry.
Following the enactment of the Act, the SEC will have 270 days to issue final regulations implementing
the provisions of the Act.
Section 923. Conforming Amendments for Whistleblower Protection
Section 923 contains conforming amendments for whistleblower protection.
Section 924. Implementation and Transition Provisions for Whistleblower Protection
Section 924 contains implementation and transition provisions for whistleblower provisions. The
section directs the SEC to issue final regulations implementing the provisions of section 21F of the
Securities Exchange Act of 1934 within 270 days within enactment of the Act.
Section 925. Collateral Bars
Section 925 gives the SEC the authority to bar individuals from being associated with various
registered securities market participants after violating the law while associated in only one area. This
provision is included in the Treasury Department‘s legislative proposal 191 . The Committee finds that this
provision is necessary because, under current rules, individuals could be barred from one registered entity
for violations, such as fraud, but then work in another industry where they could prey upon other
investors.
Section 926. Authority of State Regulators Over Regulation D Offerings
Section 926 restores certain authority of States over Regulation D offerings. This provision will
give the States the authority over certain securities sales that are not subject to the ‘33 Act requirements
due to their size and scope, as determined by the SEC.
The North American Securities Administrators Association described why this provision is
needed: ―These offerings also enjoy an exemption from registration under federal securities law, so they
receive virtually no regulatory scrutiny even where the promoters or broker-dealers have a criminal or
191 FACT SHEET: ADMINISTRATION‘S REGULATORY REFORM AGENDA MOVES FORWARD; Legislation for Strengthening Investor Protection
Delivered to Capitol Hill, U.S. Department of the Treasury, Press Release, July 10, 2009, www.financialstability.gov.
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disciplinary history. As a result, Rule 506 offerings have become the favorite vehicle under Regulation D,
and many of them are fraudulent. Although Congress preserved the states‘ authority to take enforcement
actions for fraud in the offer and sale of all ‗covered‘ securities, including Rule 506 offerings, this power
is no substitute for a state‘s ability to scrutinize offerings for signs of potential abuse and to ensure that
disclosure is adequate before harm is done to investors.‖ 192 In light of the growing popularity of Rule 506
offerings and the expansive reading of the exemption given by certain courts, NASAA believes the time
has come for Congress to reinstate state regulatory oversight of all Rule 506 offerings by repealing
Subsection 18(b)4(D) of the Securities Act of 1933.‖ 193
The Committee also heard from interested parties stating that the SEC is adequately capable of
reviewing these filings, however we note, in the words of Jennifer Johnson, that ―the SEC simply does not
have the resources, even if it had the will, to police smaller private placements. State regulators, on the
other hand, as ―local cops on the beat,‖ are well positioned to fill this regulatory gap. While states
currently have enforcement powers under NSMIA…they may not become aware of serious problems
involving Rule 506 offerings until after injured investors contact them. While states may be able to
prosecute the perpetrators of fraud, they cannot prophylactically protect future victims.‖ 194
The Committee is concerned to protect investors who, under current regulatory scheme and
practice, lack regulatory protections. There is a particular concern to protect investors from recidivist
perpetrators of securities fraud.
Section 927. Equal Treatment of Self-Regulatory Organization Rules
Section 927 provides equal treatment for the rules of all SROs under Section 29(a), which voids
any condition, stipulation, or provision binding any person to waive compliance with any provision of the
Exchange Act, any rule or regulation thereunder, or any rule of an exchange.
Section 928. Clarification That Section 205 of the Investment Advisers Act of 1940 Does Not Apply
to State-Registered Advisers
Section 928 clarifies that Sec. 205 of the Advisers Act (performance fees and advisory contracts)
does not apply to state-registered investment advisors. This is a clarification from the National Securities
Markets Improvement Act that these restrictions on investment adviser contracts do not apply to stateregistered
advisers.
Section 929. Unlawful Margin Lending
Under previous law, it was unlawful for any member of a national securities exchange or any
broker or dealer to provide margin lending to or for any customer on any non-exempt security unless the
loan met margin regulations provided for in Chapter 2B of Title 15 of the U.S. Code and was properly
collateralized. Section 929 provides that either of these two infractions is unlawful by itself.
Section 929A. Protection for Employees of Subsidiaries and Affiliates of Publicly traded Companies
Amends Section 806 of the Sarbanes-Oxley Act of 2002 to make clear that subsidiaries and
affiliates of issuers may not retaliate against whistleblowers, eliminating a defense often raised by issuers
in actions brought by whistleblowers. Section 806 of the Sarbanes-Oxley Act creates protections for
whistleblowers who report securities fraud and other violations. The language of the statute may be read
as providing a remedy only for retaliation by the issuer, and not by subsidiaries of an issuer. This
clarification would eliminate a defense now raised in a substantial number of actions brought by
whistleblowers under the statute.
192 North American Securities Administrators Association, Inc, letter to Chairman Dodd and Ranking Member Shelby, November 17, 2009.
193 Pro-Investor Legislative Agenda for the 111 th Congress, North American Securities Administrators Association, January, 2009, www.nasaa.org.
194 Johnson, Jennifer, 2010. ―Private Placements: A regulatory Black Hole‖. Delaware Journal of Corporate Law. Vol.34, p. 195.
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929B. Fair Fund Amendments
Amends Section 308 of the Sarbanes-Oxley Act of 2002 to permit the SEC use penalties obtained
from a defendant for the benefit of victims even if the SEC does not obtain disgorgement from the
defendant (e.g., because defendant did not benefit from its securities law violation that nonetheless
harmed investors). Under the Fair Fund provisions of the Sarbanes-Oxley Act, the SEC must obtain
disgorgement from a defendant before the SEC can use penalties obtained from the defendant in a Fair
Fund for the benefit of victims of the defendant‘s violation of the securities laws, or a rule or regulation
thereunder. This section would revise the Fair Fund provisions to permit the SEC to use penalties
obtained from a defendant for the benefit of victims even if the SEC does not obtain an order requiring the
defendant to pay disgorgement. In some cases, a defendant may engage in a securities law violation that
harms investors, but the SEC cannot obtain disgorgement from the defendant because, for example, the
defendant did not benefit from the violation.
Section 929C. Increasing the Borrowing limit on Treasury Loans
Section 929C updates Securities Investor Protection Act, including borrowing of funds, distinction
between securities and cash insurance, portfolio margin, and liquidation. This line of credit has not been
increased since SIPA was enacted in 1970. SEC staff believes an increase is necessary to provide the
Securities Investor Protection Corporation (SIPC) with sufficient resources in the event of the failure of a
large broker-dealer. This line of credit is used in the event that SIPC asks for a loan from the SEC and the
SEC determines that such a loan is necessary ―for the protection of customers of brokers or dealers and
the maintenance of confidence in the United States securities markets.‖ SEC staff also support
eliminating the distinction in the statute between claims for cash and claims for securities. Section 21 of
the Glass-Steagall Act, 12 USC 378, prevents broker-dealers (and any entity other than a bank) from
accepting deposits. Staff believes that the distinction between claims for cash and claims for securities has
become blurred in recent years and that the distinction can be confusing to customers.
Subtitle C
Section 931. Findings
This section contains Congressional findings that credit ratings are systemically important; relied
upon by individual and institutional investors and regulators; and central to capital formation, investor
confidence and economic efficiency. Credit rating agencies play a gatekeeper role in financial markets
that justifies the same level of oversight and accountability that applies to securities analysts, auditors, and
investment banks. Inaccurate ratings, generated in part by conflicts of interest in the process of rating
structured financial products, contributed to the mismanagement of risk by large financial institutions and
investors, which set the stage for global financial panic.
Section 932. Enhanced Regulation, Accountability, and Transparency of Nationally Recognized
Statistical Ratings Organizations
This section provides for enhanced regulation of nationally recognized statistical ratings
organization (NRSROs), greater accountability on the part of NRSROs that fail to produce accurate
ratings, and more disclosure to permit investors to better understand credit ratings and their limitations.
The section builds upon the principles of the Credit Rating Agency Reform Act of 2006, which
introduced the NRSRO designation and sought to improve ratings performance through a combination of
regulatory oversight and competition.
Enhanced Regulation
Paragraph (1) of Section 932 provides that each NRSRO shall establish, maintain, enforce, and
document an effective internal control structure governing the implementation of and adherence to
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policies, procedures, and methodologies for determining credit ratings, taking into consideration such
factors as the SEC may prescribe, by rule. This provision also calls for an annual report containing an
assessment of the effectiveness and a CEO attestation on the internal controls. In support of this
provision, Ms. Rita Bolger, Senior Vice President and Associate General Counsel of Standard & Poor‘s,
wrote in testimony for the Senate Banking Committee that ―a regulatory regime should provide for
effective oversight of registered agencies‘ compliance with their policies and procedures through robust,
periodic inspections. Such oversight must avoid interfering in the analytical process and methodologies,
and refrain from second-guessing rating opinions. External interference in ratings analytics undermines
investor confidence in the independence of the rating opinion and heightens moral hazard risk in
influencing a rating outcome.‖ 195
Section 932 also gives the SEC the authority to fine an NRSRO for violations of law or regulation.
Under previous law, the SEC could not fine NRSROs, but could only censure, place limitations on the
activities, functions, or operations of, suspend for a period not exceeding 12 months, or revoke the
registration of any NRSRO. Under this provision the SEC retains these abilities. Lynn Turner, former
Chief Accountant of the SEC, supports this provision. He wrote in testimony for the Senate Banking
Committee that ―the SEC should be given the authority to fine the agencies or their employees who fail to
adequately protect investors.‖ 196
Section 932 attempts to eliminate the effect of the inherent conflict of interest in the issuer-pays
model of the credit rating industry. Under this model, issuers of debt have the incentive to use the rating
agency that provides the highest rating. A conflict of interest thus arises because rating agencies want to
provide the highest rating to keep the issuer‘s business and are less willing to publish a lower rating. The
section addresses this conflict by directing the SEC to write rules preventing sales and marketing
considerations from influencing the production of ratings. Violation of these rules will lead to suspension
or revocation of NRSRO status if the violation affects a rating.
Section 932 addresses the role of the NRSRO compliance officer, a position created by the Credit
Rating Agency Reform Act of 2006. The section prohibits NRSRO compliance officers from participating
in production of ratings, the development of ratings methodologies, or the setting of compensation for
NRSRO employees. The section allows the SEC to provide exemptions for small NRSROs if the SEC
finds that compliance would impose an unreasonable burden.
Section 932 also directs NRSRO compliance officers to establish procedures for the receipt,
retention, and treatment of complaints about the rating agency or its ratings. Finally, the section directs
the compliance officer to submit to the NRSRO an annual report on its compliance with the securities
laws, and its related policies and procedures. The NRSRO must submit this report to the SEC.
Paragraph 6 of Section 932 establishes the Office of Credit Ratings within the SEC. The Office
shall administer the rules of the SEC with respect to NRSROs to protect investors and the public interest,
to promote accuracy in credit ratings, and to prevent conflicts of interest from unduly influencing credit
ratings. The Director of the Office will report to the Chairman of the SEC. The Office will be adequately
staffed to fulfill its statutory role and will include persons with knowledge of and expertise in corporate,
municipal, and structured debt.
195 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.11 (2009)(Testimony of Ms. Rita Bolger).
196 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.11 (2009)(Testimony of Mr. Lynn Turner).
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The Committee believes that the unique nature of NRSRO oversight warrants an independent
office within the SEC. The fact that there will be a dedicated Office within the SEC to focus on NRSROs
should improve the quality and efficiency of the regulation. Many advocated for a separate Office within
the SEC to carry out the regulation of NRSROs because of the NRSRO‘s unique and distinct role from
the other entities overseen by the SEC. Mr. Deven Sharma, President of Standard & Poor‘s, supports
―creating a dedicated office within the SEC to oversee NRSROs.‖ 197
The Office of Credit Ratings shall conduct annual examinations of each NRSRO. Each
examination will include a review of the policies, procedures, and rating methodologies of the NRSRO
and whether the NRSRO follows these; the management of conflicts of interest by the NRSRO; the
implementation of ethics policies; the internal supervisory controls of the NRSRO; the governance of the
NRSRO; the activities of the NRSRO compliance officer; the processing of complaints by the NRSRO;
and the policies of the NRSRO governing the post-employment activities of former staff.
The SEC will make public, in an easily understandable format, an annual report summarizing the
essential findings of all NRSRO examinations that year. The report shall include the responses of
NRSROs to material regulatory deficiencies identified by the SEC and to recommendations made by the
SEC.
Many interested parties believe that, given the rating agencies‘ important role in the financial
markets, it is appropriate and desirable for the SEC to examine them as they would other securities firms.
Mr. Lynn Turner, former Chief Accountant of the SEC wrote in congressional testimony that ―the SEC
has insufficient authority over the credit ratings agencies despite the roles those firms played in Enron and
now the sub-prime crisis. This deficiency needs to be remedied by giving the SEC the authority to inspect
credit ratings, just as Congress gave the PCAOB the ability to inspect independent audits.‖ 198 Ms. Barbara
Roper, Director of Investor Protection at the Consumer Federation of America, wrote in testimony that
―the agency should have authority to examine individual ratings engagements to determine not only that
analysts are following company practices and procedures but that those practices and procedures are
adequate to develop an accurate rating. Congress would need to ensure that any such oversight function
was adequately funded and staffed.‖ 199 Standard & Poor‘s President Deven Sharma wrote in testimony
that S&P supports ―empowering the SEC to conduct frequent reviews of NRSROs to ensure that NRSROs
follow their internal controls and policies for determining ratings and managing conflicts of interest.‖ 200
Accountability
Paragraph (2) of Section 932 provides that the SEC may temporarily suspend or permanently
revoke the registration of an NRSRO with respect to a particular class or subclass of securities, if the SEC
finds, on the record after notice and opportunity for hearing, that NRSRO does not have adequate
financial and managerial resources to consistently produce credit ratings with integrity. In determining
whether an NRSRO lacks such resources, the SEC shall consider an NRSRO‘s failure to consistently
produce accurate ratings over a sustained period of time.
Subsection (q) of Paragraph 6 of Section 932 directs the SEC to require that each NRSRO publicly
disclose information on the initial credit ratings published by the NRSRO for each type of obligor,
197 Reforming Credit Rating Agencies: Testimony before the U.S. House Committee on Financial Services, 111 th Congress, 1 st session, p.12 (2009)(Testimony
of Mr. Deven Sharma).
198 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.11 (2009)(Testimony of Mr. Lynn Turner).
199 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.9 (2009)(Testimony of Ms. Barbara Roper).
200 Reforming Credit Rating Agencies: Testimony before the U.S. House Committee on Financial Services, 111 th Congress, 1 st session, p.12 (2009)(Testimony
of Mr. Deven Sharma).
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security, and money market instrument and any subsequent changes to such credit ratings. The purpose of
this disclosure is to allow users of credit ratings to compare the performance and accuracy of ratings
issued by different NRSROs. Disclosures would be clear and informative for investors with varying levels
of financial sophistication.
This provision seeks to address the lack of market competition in the credit rating industry by
allowing investors to compare NRSRO performance. Industry analysts often identify the lack of
competition as one reason why the industry performed poorly in rating securities, such as mortgagebacked
securities, and thus contributed to the economic crisis of 2008. To portray the concentrated market
for credit ratings, Sean Egan, Managing Director of Egan-Jones Ratings Co., noted that S&P and Moody's
control over 90% of the revenues in the ratings industry. 201 This provision will make rating performance
public — the goal is to foster market competition by forcing ratings firms to compete on the basis of their
rating accuracy. In support of this proposal, Mr. George Miller, Executive Director of the American
Securitization Forum, wrote in congressional testimony ―we support the publication in a format
reasonably accessible to investors of a record of all ratings actions for securitization instruments for which
ratings are published. We believe that publication of these data will enable investors and other market
participants to evaluate and compare the performance, stability and quality of ratings judgments over
time.‖ 202 Mr. Rita Bolger, on behalf of Standard & Poor‘s, an NRSRO, supports this performance
disclosure. She wrote in congressional testimony that a way to promote sound rating oversight would be
to ―require registered rating agencies to publicly issue performance measurement statistics over the short,
medium, and long term, and across asset classes and geographies.‖ 203
Finally, this subsection makes accommodation for subscriber-pay NRSROs, by mandating that the
disclosure be appropriate to the business model of an NRSRO. For these NRSROs, the publication of
rating performance would likely be unsustainable because they rely on credit rating users to pay them for
ratings.
During the markup of this legislation, the Committee adopted an amendment proposed by Senator
Bennet that would require that at least one-half the members of NRSRO boards be independent directors.
Independent directors are defined as those who do not accept consulting, advisory, or other fees from the
NRSRO; are not associated with the NRSRO or an affiliate; and do not participate in any deliberation
involving a rating in which the independent director has a financial interest. The NRSRO board must be
responsible for establishing, maintaining, and enforcing policies and procedures for determining credit
ratings; preventing conflicts of interests; the internal control systems; and compensation practices. The
provision authorizes the SEC to grant an exemption from independence rules for small NRSROs where
compliance would present an unreasonable burden, provided that the responsibilities of the board are
delegated to a committee including at least one user of NRSRO ratings.
Disclosure
Subsection (r) of Paragraph 6 of Section 932 directs the SEC to prescribe rules to require each
NRSRO to ensure that credit ratings are determined using procedures and methodologies that are
approved by the board of directors or senior credit officer. The SEC‘s rules must require that material
changes to ratings procedures and methodologies be applied consistently and publicly disclosed. Such
201 Examining the Role of Credit Rating Agencies in the Capital Markets: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban
Affairs, 109 th Congress, 2 nd session, p.1 (2005)(Testimony of Mr. Sean Egan).
202 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session, p.25 (2009)(Testimony of Mr. George Miller).
203 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.9 (2009)(Testimony of Ms. Rita Bolger).
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changes must be applied to all credit ratings to which they apply within a reasonable time period, to be
determined by the SEC.
The rules will also require each NRSRO to notify users of credit ratings when a material change is
made to a procedure or methodology, and when a significant error is identified in a procedure or
methodology that may result in credit rating actions. Ms. Rita Bolger, Senior Vice President and
Associate General Counsel of Standard & Poor‘s, wrote in testimony for the Senate Banking Committee
that ―with greater transparency of credit rating agency methodologies, investors would be in a better
position to assess the opinions.‖ 204
Subsection (s) of Paragraph 6 of Section 932 directs the SEC to require NRSROs, by rule, to
publish a form with each rating that discloses qualitative and quantitative information that is intended to
enable investors and users of credit ratings to better understand the main principles and assumptions that
underlie the rating. The disclosures shall be easy to use, directly comparable across different classes of
securities, and may be provided in either paper or electronic form, as the SEC may, by rule, determine.
The qualitative content of the form shall include the credit ratings produced; the main assumptions
and principles used in constructing procedures and methodologies (including qualitative methodologies
and quantitative inputs and assumptions about the correlation of defaults across obligors used in rating
structured products); the potential limitations of the credit ratings and the types of risks excluded from the
credit ratings that the NRSRO does not comment on; information on the uncertainty of the credit rating
including information on the reliability, accuracy, and quality of the data relied on in determining the
credit rating; a statement on the reliability and limitations of the data relied upon and any other data
accessibility limitations; and whether and to what extent third party due diligence services have been used
by the NRSRO, including a description of the information that such third party reviewed in conducting
due diligence services and a description of the findings or conclusions of such third party.
The form shall include an overall assessment of the quality of information available and
considered in producing a rating in relation to the quality of information available to the NRSRO in rating
similar issuances; information relating to conflicts of interest of the nationally recognized statistical rating
organization; and such additional information as the SEC may require.
The quantitative content will include an explanation or measure of the potential volatility of the
credit rating (including any factors that might lead to a change in the credit ratings), information on the
sensitivity of the rating to assumptions made by the NRSRO, and the extent of the change that a user can
expect under different market conditions. In addition, the disclosures will include information on the
historical performance of the rating and the expected probability of default and the expected loss in the
event of default.
These substantial disclosures will give investors and other market participants far more
information about the credit risk of a debt issue and the reliability of ratings. Dr. William Irving, Portfolio
Manager at Fidelity Investments, wrote in congressional testimony that the Committee should ―facilitate
greater transparency of the methodology and assumptions used by the rating agencies to determine credit
ratings. In particular, there should be public disclosure of the main assumptions behind rating
methodologies and models. Furthermore, when those models change or errors are discovered, the market
should be notified.‖ 205 Mr. George Miller, Executive Director of the American Securitization Forum,
204 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.9 (2009)(Testimony of Ms. Rita Bolger).
205 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session, p.12 (2009)(Testimony of Dr. William Irving).
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added that he ―strongly supports enhanced disclosure of securitization ratings methods and processes,
including information relating to the use of ratings models and key assumptions utilized by those
models.‖ 206 The Council of Institutional Investors wrote in a letter to Senator Dodd that it supports these
reforms designed to ―improve the transparency of rating methodologies and assumptions and make rating
agencies truly accountable to the investors that depend on them.‖ 207
Another disclosure that the NRSROs will have to make regards due diligence services. Subsection
(s) provides the findings and conclusions of any third-party due diligence report obtained by the issuer or
underwriter of an asset-backed security shall be made public, in a format to be determined by the SEC.
The disclosures shall be in a manner that allows the public to determine the adequacy and level of due
diligence services provided by a third party. Many analysts point to the decline of due diligence as a
factor that contributed to the poor performance of asset-backed securities during the crisis. Professor John
Coffee described the effect of poor due diligence in the credit rating industry in testimony for the Senate
Banking Committee: ―Unlike other gatekeepers, the credit rating agencies do not perform due diligence or
make its performance a precondition of their ratings. In contrast, accountants are, quite literally, bean
counters who do conduct audits. But the credit rating agencies do not make any significant effort to verify
the facts on which their models rely (as they freely conceded to this Committee in earlier testimony here).
Rather, they simply accept the representations and data provided them by issuers, loan originators and
underwriters. The problem this presents is obvious and fundamental: no model, however well designed,
can outperform its information inputs – Garbage, In; Garbage Out. … Ultimately, unless the users of
credit ratings believe that ratings are based on the real facts and not just a hypothetical set of facts, the
credibility of ratings, particularly in the field of structured finance, will remain tarnished, and private
housing finance in the U.S. will remain starved and underfunded because it will be denied access to the
broader capital markets.‖ 208 Ms. Barbara Roper, Director of Investor Protection at the Consumer
Federation of America, also believes that this provision is important. She wrote in congressional
testimony that new legislation should address ―lack of due diligence regarding information on which
ratings are based.‖ 209
Section 933. State of Mind in Private Actions
Section 933 was introduced by Senator Reed. It provides that the enforcement and penalty
provisions applicable to statements made by a credit rating agency shall apply in the same manner and to
the same extent as to statements made by a registered public accounting firm or a securities analyst, and
such statements shall not be deemed forward looking statements. In actions for money damages brought
against a credit rating agency or a controlling person, it shall be sufficient for pleading any required state
of mind in relation to such action, that the complaint state facts giving rise to a strong inference that the
credit rating agency knowingly or recklessly failed to conduct a reasonable investigation of the factual
elements of the rated security, or failed to obtain reasonable verification of such factual elements from
independent sources that it considered to be competent.
Section 933 specifies that, for purposes of passing the pleading test of the Private Securities
Litigation Reform Act, plaintiffs need not plead that the CRA "knowingly or recklessly" engaged in a
deceptive misrepresentation or omission in communicating with investors, but instead requires only that
they plead that the CRA "knowingly or recklessly failed ... to conduct a reasonable investigation ... with
respect to ... factual elements ... or to obtain reasonable verification of such ... elements..."
206 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session, p.25 (2009)(Testimony of Mr. George Miller).
207 Mr. Jeff Mahoney, Council of Institutional Investors, letter to Senator Dodd, p.3, November 18, 2009.
208 Examining Proposals to Enhance the Regulation of Credit Rating Agencies: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban
Affairs, 111 th Congress, 1 st session, pp.1-2 (2009)(Testimony of Professor John Coffee).
209 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.8 (2009)(Testimony of Ms. Barbara Roper).
99

The Section permits plaintiffs to more easily pass the motion to dismiss stage of litigation. It does
not change the ultimate standard used by a fact-finder in determining whether the basic elements of 10b-5
have been met.
Columbia University Law Professor John C. Coffee testified before the Committee that this
provision ―struck a very sensible compromise in my judgment. It created a standard of liability for the
rating agencies, but one with which they easily could comply (if they tried).‖ He opined that this
―language does not truly expose rating agencies to any serious risk of liability – at least if they either
conduct a reasonable investigation themselves or obtain verification from others (such as a due diligence
firm) that they reasonably believed to be competent and independent . . . so that a rating agency would be
fully protected when it received such a certification from an independent due diligence firm that covered
the basic factual elements in its model.‖
Professor Coffee further testified, ―The case for this limited litigation threat is that it is unsafe and
unsound to let rating agencies remain willfully ignorant. Over the last decade, they have essentially been
issuing hypothetical ratings in structured finance transactions based on hypothetical assumed facts
provided them by issuers and underwriters. Such conduct is inherently reckless; the damage that it caused
is self-evident, and the proposed language would end this state of affairs (without creating anything
approaching liability for negligence). 210
Section 934. Referring Tips to Law Enforcement or Regulatory Authorities
Section 934 provides that each NRSRO will refer to the appropriate law enforcement or regulatory
authorities any information that the NRSRO receives and finds credible that alleges that an issuer of
securities rated by the NRSRO has committed or is committing a violation of law that has not been
adjudicated by a Federal or State court. This is in effect a mandatory whistle-blowing provision, and
exceptions could be created to cover circumstances when the compliance officer concluded that the
information was false or unreliable. This provision requires the NRSRO to determine whether it feels the
information is credible, but does not require the NRSRO to undertake extensive fact finding or analysis or
to determine whether a violation of law has occurred.
Section 935. Consideration of Information from Sources Other Than the Issuer in Rating
Decisions
Section 935 provides that NRSROs must consider information about an issuer that the NRSRO
has, or receives from a source other than the issuer, that the NRSRO finds credible and potentially
significant to a rating decision. The Section does not require an NRSRO to initiate a search for such
information. The information is expected to be evaluated on its own merits as to whether it indeed should
affect the rating. The Committee believes that if the NRSRO possesses credible information that is
significant to a rating decision about an issuer, it should consider it even if it has not undertaken to
independently verify information it has received from an issuer.
NRSROs use data received from issuers in formulating a rating and may not undertake to verify it.
For example, one NRSRO states:
―While [the NRSRO] has obtained information from sources it believes to be reliable, [the
NRSRO] does not perform an audit and undertakes no duty of due diligence or
independent verification of any information it receives.‖
210 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Professor John Coffee).
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This type of disclosure and policy may create the appearance that the NRSRO
could receive credible, material information about the creditworthiness of an issuer from
an outside source but choose not to consider it in formulating a rating. Such information
could come from a highly credible press report, information from a knowledgeable
industry insider, views from a former employee or other source.
Mr. James Gellert, Chairman of Rapid Ratings International, Inc., wrote in
congressional testimony that ―we believe that, if a rating agency‘s business model is to
provide qualitative assessments of an entity or pool of assets collateralizing a structured
product, it should take into account all data it can reasonably attain and qualify as being
reliable.‖ 211
Section 936. Qualification Standards for Credit Rating Analysts
Section 936 directs the SEC to issue rules reasonably designed to ensure that any person employed
by an NRSRO to perform credit ratings meets standards of training, experience, and competence
necessary to produce accurate ratings; and is tested for knowledge of the credit rating process.
Following the devastating impact on investors, the economy, and families that erroneous ratings
had during the credit crisis, the Committee feels there is need to improve the analysis underlying credit
ratings. This requirement is intended to improve the quality of ratings by increasing the skills of those
who formulate them. This section would require credit rating analysts to meet high professional standards
for their industry, just as investment advisers, registered representatives, and auditors do for theirs.
Mr. Mark Froeba testified before the Committee about concerns that ―Every rating agency
employs ‗rating analysts‘ but there are no independent standards governing this ‗profession‘: there are no
minimum educational requirements, there is no common code of ethical conduct, and there is no
continuing education obligation. Even where each agency has its own standards for these things, the
standards differ widely from agency to agency. One agency may assign a senior analyst with a PhD in
statistics to rate a complex transaction; another might assign a junior analyst with a BA in international
relations to the same transaction. The staffing decision might appear to investors as yet another tool to
manipulate the rating outcome.‖ 212
Section 937. Timing of Regulations
Section 937 directs the SEC to issue final regulations within 1 year of the date of enactment of the
Act.
Section 938. Universal Ratings Symbols
Section 938 was introduced by Senator Menendez. It requires NRSROs to clearly define any
symbols used to denote a credit rating, and apply any such symbols in a consistent manner to all types of
securities and money market instruments to which they are applied. The Committee believes that an
NRSRO‘s credit rating symbol should have the same meaning about creditworthiness when it is applied to
any issuer – the same symbol should not have different meaning depending on the issuer. This Section
does not dictate the meaning of any credit rating -- whether it refers to an issuer‘s likelihood of default,
ability to pay on time, or other factors. Also, this Section does not prevent an NRSRO from using distinct
sets of symbols to denote credit ratings for different types of securities.
211 Examining Proposals to Enhance the Regulation of Credit Rating Agencies: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban
Affairs, 111 th Congress, 1 st session, p.18 (2009)(Testimony of Mr. James Gellert).
212 Examining Proposals to Enhance the Regulation of Credit Rating Agencies: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban
Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Mark Froeba).
101

Some observers have expressed concerns that some rating agencies apply stricter standards to
municipal debt than to corporate debt. Consumer Federation of America and Americans for Financial
Reform stated, ―Most municipal bonds are rated on a different, more conservative rating scale than
corporate bonds. This dual system employed by the largest rating agencies ends up costing state and local
governments and their taxpayers over a billion dollars a year, a cost these governments can ill
afford. Bond issuers, be they corporate bond issuers or municipal bond issuers, should be rated on the
same standard—the likelihood of default.‖ 213 They recommended that the legislation require each
NRSRO to: (1) establish, maintain and enforce written policies and procedures designed to assess the risk
that investors in securities and money market instruments may not receive payment in accordance with
the terms of such securities and instruments, (2) define clearly any credit rating symbols used by the
organization, and (3) apply such credit rating symbols in a consistent manner for all types of securities
and money market instruments.‖ 214 The National Association of State Treasurers stated that ―Bond
ratings have a direct impact on the interest rates at which governments can issue their bonds to finance the
construction of critically-need infrastructure, and the ratings given to these bonds by the major credit
ratings agencies play a large role in determining the cost that taxpayers assume when their governments
invest in infrastructure . . . We believe that ratings applied to municipal bonds should indicate the same
risk as the identical rating applied to a corporate bond, while also recognizing the need for relative ratings
among municipal issuers. We further believe that ratings should measure the ability of an issuer to meet
its obligation to investors as promised in the bond documents, such obligation primarily being to pay its
debt service on time and in full.‖ 215
Section 939. Government Accountability Office Study and Federal Agency Review of Required Uses
of Nationally Recognized Statistical Rating Organization Ratings
Section 939 directs the GAO to study the scope of Federal and State laws and regulations with
respect to the regulation of securities markets, banking, insurance, and other areas that require the use of
ratings issued by NRSROs. Consulting with a range of regulators and market participants, GAO shall
evaluate the necessity of such rating requirements and the potential impact on markets and investors of
removing them. Within 2 years of the date of enactment of this Act, the GAO shall report to Congress
with recommendations on which ratings requirements, if any, could be removed with minimal disruption
to the markets and whether the financial markets and investors would benefit from the rescission of the
ratings requirements identified by the study.
Within one year of the completion of GAO‘s report, the SEC and other financial regulators shall
review rating requirements in their regulations, and shall remove such rating requirements, unless they
determine that there is no reasonable alternative standard of creditworthiness to replace a credit rating,
and that removing the rating requirement would be inconsistent with the purposes of the statute that
authorized the regulation and not in the public interest.
Currently, there are numerous instances in government rules and regulations that require the use of
NRSRO ratings. This gives the ratings a tacit government sanction. Many observers have recommended
to the Senate Banking Committee to enact policy to remove these references to ratings. Professor
Lawrence White advised ―Eliminate regulatory reliance on ratings -- eliminate the force of law that has
been accorded to these third-party judgments. The institutional participants in the bond markets could
then more readily (with appropriate oversight by financial regulators) make use of a wider set of providers
213 Consumer Federation of America, Letter to Senators Dodd and Shelby, November 24, 2009.
214 Letter to Chairman Dodd and Ranking Member Shelby, November 24, 2009
215 Letter dated November 17, 2009
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of information, and the bond information market would be opened to new ideas and new entry in a way
that has not been possible for over 70 years.‖
One concern is that the reliance on ratings has become so prevalent that the abrupt removal of
ratings could cause unintended consequences and negative effects in the market. Therefore, the
Committee provides for a GAO study of the reliance on ratings. Supporting the caution behind this
approach, Mr. George Miller, Executive Director of the American Securitization Forum, wrote in
congressional testimony ―ASF believes that credit ratings are an important part of existing regulatory
regimes, and that steps aimed at reducing or eliminating the use of ratings in regulation should be
considered carefully, to avoid undue disruption to market function and efficiency.‖ The Investor‘s
Working Group 216 and Mr. Andrew Davidson 217 also support the ultimate goal of reducing the reliance on
ratings. The studies would identify those requirements for NRSRO ratings for which there is a necessity
and those requirements which could be removed with minimal disruption to the markets over a
sufficiently long time period to fully explore possible unintended consequences, alternative measures of
creditworthiness and other factors which can ultimately lead to strengthening the financial markets.
Section 939A. Securities and Exchange Commission Study on Strengthening Credit Rating Agency
Independence
Section 939A directs the SEC to conduct a study of the independence of NRSROs, evaluate the
management of conflicts of interest by NRSROs, and evaluate the potential impact of rules prohibiting an
NRSRO that provided a rating to an issuer from providing other services to the issuer. The Committee
intends this study to include an identification of the types and scope of services provided by NRSROs and
which of these services raises a potential for raising a conflict that could change a rating and to cover
other relevant issues identified by GAO.
Section 939B. Government Accountability Office Study on Alternative Business Models
Section 939B directs the GAO to conduct a study on alternative means of compensating NRSROs
in order to create incentives for NRSROs to provide more accurate ratings and any statutory changes that
would be required to facilitate these changes. The GAO will submit this report, with recommendations,
within one year of passage of the Act. The predominant NRSRO business model involves the issuer
paying for the rating, while a small number of NRSROs rely on subscription fees from users. The
Committee asks the GAO to analyze which model is likely to produce the most accurate ratings.
The Committee recognizes that conflicts of interest exist for NRSROs and is interested in an
analysis of how and whether they are effectively managed so that they do not unfairly influence ratings
decisions. The study should include any recommendations for legislative, regulatory or voluntary industry
action. Mr. Stephen Joynt, President and CEO of Fitch, testified ―The majority of Fitch‘s revenues are
fees paid by issuers for assigning and maintaining ratings. This is supplemented by fees paid by a variety
of market participants for research subscriptions. The primary benefit of this model is that it enables Fitch
to be in a position to offer analytical coverage on every asset class in every capital market – and to make
our rating opinions freely available to the market in real-time, thus enabling the market to freely and fully
assess the quality of our work. Fitch has long acknowledged the potential conflicts of being an issuer-paid
rating agency. Fitch believes that the potential conflicts of interest in the ―issuer pays‖ model have been,
and continue to be, effectively managed through a broad range of policies, procedures and organizational
structures aimed at reinforcing the objectivity, integrity and independence of its credit ratings, combined
with enhanced and ongoing regulatory oversight.‖
216 U.S. Financial Regulatory Reform: An Investor‘s Perspective, Investor‘s Working Group, July 2009.
217 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session (2009)(Testimony of Mr. Andrew Davidson).
103

Mark Froeba, Principal at PF2 Securities Evaluations, Inc. and former Senior Vice President at
Moody‘s, testified that ―there are those who believe that real rating agency reform requires a return to an
investor-pay model. But there may be a third way, a business model that preserves the issuer- pay
―delivery system‖ (the issuer still gets the bill for the rating) but incorporates the incentives of the
investor-pay model… These and other reforms are necessary not only to restore investor confidence in
ratings but also to prevent future ratings-related financial crises.‖ 218
Section939C. Government Accountability Office Study on the Creation of an Independent
Professional Analysts Organization
Section 939C directs the GAO to conduct a study on the feasibility and merits of creating an
independent professional organization for NRSRO rating analysts that would establish independent
standards for governing the rating analyst profession, establishing a code of ethical conduct, and
overseeing the rating analyst profession. The GAO shall submit a report to the relevant congressional
committees within one year of passage of the Act. In the aftermath of the devastating financial crisis
caused in part by poor credit ratings, the Committee is interested in exploring means to increase the skills
of the professionals who produce credit ratings. This Section directs the GAO to explore the potential
impact of an independent professional analysts organization. Mark Froeba, Principal at PF2 Securities
Evaluations, Inc. and former Senior Vice President at Moody‘s, testified that he recommended the
creation of ―an independent professional organization for rating analysts. Every rating agency employs
‗rating analysts‘ but there are no independent standards governing this ‗profession‘: there are no minimum
educational requirements, there is no common code of ethical conduct, and there is no continuing
education obligation. Even where each agency has its own standards for these things, the standards differ
widely from agency to agency. One agency may assign a senior analyst with a PhD in statistics to rate a
complex transaction; another might assign a junior analyst with a BA in international relations to the same
transaction . . . Creating one independent professional organization to which rating analysts from all rating
agencies must belong will ensure uniform standards — especially ethical standards — across all the rating
agencies. It would also provide a forum external to the agencies where rating analysts might bring
confidential complaints about ethical concerns. An independent organization could track and report the
nature and number of these complaints and alert regulators if there are patterns in the complaints,
problems at particular agencies, and even whether there are problems with particular managers at one
rating agency. Finally, such an organization should have the power to discipline analysts for unethical
behavior.‖ 219
Subtitle D
Section 941. Regulation of Credit Risk Retention
This section requires securitizers, defined as those who issue, organize, or initiate asset-backed
securities, to retain an economic interest in a material portion of the credit risk for any asset that
securitizers transfer, sell, or convey to a third party. The provision intends to create incentives that will
prevent a recurrence of the excesses and abuses that preceded the crisis, restore investor confidence in
asset-backed finance, and permit securitization markets to resume their important role as sources of credit
for households and businesses.
The Committee‘s investigation into the causes of the financial crisis identified abuses of the
securitization process as a major contributing factor. Two problems emerged in the crisis. First, under the
218 Examining Proposals to Enhance the Regulation of Credit Rating Agencies: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban
Affairs, 111 th Congress, 1 st session, p.18 (2009)(Testimony of Mr. Mark Froeba).
219 Examining Proposals to Enhance the Regulation of Credit Rating Agencies: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban
Affairs, 111 th Congress, 1 st session, p.18 (2009)(Testimony of Mr. Mark Froeba).
104

―originate to distribute‖ model, loans were made expressly to be sold into securitization pools, which
meant that the lenders did not expect to bear the credit risk of borrower default. This led to significant
deterioration in credit and loan underwriting standards, particularly in residential mortgages. According to
the testimony of Dr. William Irving, Portfolio Manager of Fidelity Investments:
Without a doubt, securitization played a role in this crisis. Most importantly, the ―originate-todistribute‖
model of credit provision seemed to spiral out of control. Under this model,
intermediaries found a way to lend money profitably without worrying if the loans were paid back.
The loan originator, the warehouse facilitator, the security designer, the credit rater, and the
marketing and product-placement professionals all received a fee for their part in helping to create
and distribute the securities. These fees were generally linked to the size of the transaction and
most of them were paid up front. So long as there were willing buyers, this situation created
enormous incentive to originate mortgage loans solely for the purpose of realizing that up-front
intermediation profit. 220
Second, it proved impossible for investors in asset-backed securities to assess the risks of the
underlying assets, particularly when those assets were resecuritized into complex instruments like
collateralized debt obligations (CDOs) and CDO-squared. With the onset of the crisis, there was
widespread uncertainty regarding the true financial condition of holders of asset-backed securities,
freezing interbank lending and constricting the general flow of credit. Complexity and opacity in
securitization markets created the conditions that allowed the financial shock from the subprime mortgage
sector to spread into a global financial crisis, as Professor Patricia A. McCoy testified before the
Committee:
General investor panic is [another] reason for contagion. Even in transactions involving no
nonprime collateral, concerns about the nonprime crisis had a ripple effect, making it hard for
companies and cities across-the-board to secure financing. Banks did not want to lend to other
banks out of fear that undisclosed nonprime losses might be lurking on their books. Investors did
not want to buy other types of securitized bonds, such as those backed by student loans or car
loans, because they lost faith in ratings and could not assess the quality of the underlying
collateral. 221
Section 941 directs the Federal banking agencies and the SEC to jointly prescribe regulations to
require any securitizer to retain a material portion of the credit risk of any asset that the securitizer,
through the issuance of an asset-backed security, transfers, sells, or conveys to a third party. When
securitizers retain a material amount of risk, they have ―skin in the game,‖ aligning their economic
interests with those of investors in asset-backed securities. Securitizers who retain risk have a strong
incentive to monitor the quality of the assets they purchase from originators, package into securities, and
sell.
The regulations will prohibit securitizers from hedging or otherwise transferring the credit risk
they are required to retain. The prohibition does not extend to hedging risks other than credit risk (such as
interest rate risk) associated with the retained assets or position. Originators (defined as persons who
through the extension of credit or otherwise create financial assets that collateralize an asset-backed
security, and sell assets to a securitizer) will come under increasing market discipline because securitizers
who retain risk will be unwilling to purchase poor-quality assets. Thus, the bill does not require that the
220 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session, (2009)(Testimony of Dr. William Irving).
221 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session, (2009)(Testimony of Patricia A. McCoy).
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egulations impose risk retention obligations on originators. Risk retention may be divided between
securitizers and originators only if the regulators consider that assets being securitized do not have
characteristics of low credit risk, that conditions in securitization markets are creating incentives for
imprudent origination, and that allocating part of the risk retention obligation to originators would not
prevent consumers and businesses from obtaining credit on reasonable terms.
There is broad support for risk retention by securitizers. The provision was included in the
Treasury Department‘s 2009 legislative proposal 222 . Mr. George Miller, Executive Director of the
American Securitization Forum, testified before the Committee that ―we support the concept of requiring
retention of a meaningful economic interest in securitized loans as a means of creating a better alignment
of incentives among transaction participants.‖ 223 The Group of Thirty recommended risk retention as part
of broad financial reform:
The healthy redevelopment of securitized credit markets requires a restoration of market
confidence in the adequacy and sustainability of credit underwriting standards. To help achieve
this, regulators should require regulated financial institutions to retain a meaningful portion of the
credit risk they are packaging into securitized and other structured credit products. 224
The Consumer Federation of America 225 , CalPERS 226 , and the Investor‘s Working Group 227 also support
this provision.
The Committee believes that implementation of risk retention obligations should recognize the
differences in securitization practices for various asset classes. Witnesses before the Committee and a
number of market participants have indicated that a ―one size fits all‖ approach to risk retention may
adversely affect certain securitization markets. For example, Mr. J. Christopher Hoeffel of the
Commercial Mortgage Securities Association testified that ―[P]olicymakers must ensure that any
regulatory reforms are tailored to address the specific needs of each securitization asset class. Again,
CMSA does not oppose these [risk retention] measures per se, but emphasizes that they should be tailored
to reflect key differences between the different asset-backed securities markets.‖ 228 Accordingly, the bill
requires that the initial joint rulemaking include separate components addressing individual asset
classes—home mortgages, commercial mortgages, commercial loans, auto loans, and any other asset class
that the regulators deem appropriate. The Committee expects that these regulations will recognize
differences in the assets securitized, in existing risk management practices, and in the structure of assetbacked
securities, and that regulators will make appropriate adjustments to the amount of risk retention
required.
In addition, the risk retention rules may provide a total or partial exemption for any securitization,
as may be appropriate in the public interest and for the protection of investors. The Committee expects
that asset-backed securities backed by the full faith and credit of the United States, or where the
underlying assets were guaranteed by an agency of the United States, would qualify for such an
exemption.
222 Title IX – Additional Improvements to Financial Markets Regulation Subtitle D, U.S. Department of the Treasury, 2009, www.financialstability.gov.
223 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session, p.19 (2009)(Testimony of Mr. George Miller).
224 Financial Reform: A Framework for Financial Stability, Group of Thirty, p. 49, January 15, 2009.
225 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Ms. Barbara Roper).
226 Regulating Hedge Funds and Other Private Investment Pools: Testimony before the Subcommittee on Securities, Insurance, and Investment of the U.S.
Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st session, (2009)(Testimony of Mr. Joseph Dear).
227 U.S. Financial Regulatory Reform: An Investor‘s Perspective, Investor‘s Working Group, July 2009.
228 [Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress,
1 st session, (2009)(Testimony of Mr. J. Christopher Hoeffel).]
106

The section provides a baseline risk retention amount of 5 percent of the credit risk in any
securitized asset. The figure may be set higher at the regulators‘ discretion, or it may be reduced below 5
percent when the assets securitized meet standards of low credit risk to be established by rule for the
various asset classes. The Committee believes that regulators should have flexibility in setting risk
retention levels, to encourage recovery of securitization markets and to accommodate future market
developments and innovations, but that in all cases the amount of risk retained should be material, in
order to create meaningful incentives for sound and sustainable securitization practices.
The section also authorizes regulators to make exemptions, exceptions, or adjustments to the risk
retention rules, provided that any such exemptions, exceptions, or adjustments help ensure high
underwriting standards, encourage appropriate risk management practices, improve access to credit on
reasonable terms, or are otherwise in the public interest.
Section 942. Disclosures and Reporting for Asset-Backed Securities
Section 942 seeks to improve transparency in asset-backed securities. It directs the SEC to adopt
regulations requiring each issuer of an asset-backed security to disclose, for each tranche or class of
security, information regarding the assets backing that security. These disclosures shall be in a format that
facilitates comparison of such data across securities in similar types of asset classes. Issuers of assetbacked
securities shall disclose asset-level or loan-level data necessary for investors to independently
perform due diligence. This data would include data having unique identifiers relating to loan brokers or
originators, the nature and extent of the compensation of the broker or originator of the assets backing the
security, and the amount of risk retention by the originator or the securitizer of such assets. The
Committee does not expect that disclosure of data about individual borrowers would be required in cases
such as securitizations of credit card or automobile loans or leases, where asset pools typically include
many thousands of credit agreements, where individual loan data would not be useful to investors, and
where disclosure might raise privacy concerns.
Mr. George Miller, Executive Director of the American Securitization Forum, wrote in testimony
for the Committee that ―ASF supports increased transparency and standardization in the securitization
markets, and related improvements to the securitization market infrastructure. … ASF believes that every
mortgage loan should be assigned a unique identification number at origination, which would facilitate
the identification and tracking of individual loans as they are sold or financed in the secondary market,
including via RMBS securitization.‖ 229 The Investor‘s Working Group wrote in a report that ―the SEC
should develop a regulatory regime for such asset‐backed securities that would require issuers to make
prospectuses available for potential investors in advance of their purchasing decisions. These prospectuses
should disclose important information about the securities, including the terms of the offering,
information about the sponsor, the issuer and the trust, and details about the collateral supporting the
securities. Such new rules would give investors critical information they need to perform due diligence on
offerings prior to investing. It would also create better opportunities for due diligence by the underwriters
of such securities, thus adding additional levels of oversight of the quality and appropriateness of
structured offerings.‖ 230 Professor Patricia McCoy wrote in testimony ―the SEC should require
securitizers to provide investors with all of the loan-level data they need to assess the risks involved…. In
addition, the SEC should require securitizers and servicers to provide loan-level information on a monthly
basis on the performance of each loan and the incidence of loan modifications and recourse.‖ 231
229 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session, p.18 (2009)(Testimony of Mr. George Miller).
230 U.S. Financial Regulatory Reform: An Investor‘s Perspective, Investor‘s Working Group, p.14, July 2009.
231 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session, p.13 (2009)(Testimony of Professor Patricia McCoy).
107

CalPERS 232 , Mr. Andrew Davidson 233 , and Dr. William Irving 234 also supported enhanced disclosure in
testimony before the Committee.
Section 943. Representations and Warranties in Asset-Backed Offerings
This section directs the SEC to prescribe regulations on the use of representations and warranties
in the market for asset-backed securities that require each NRSRO to include in any report accompanying
a credit rating a description of the representations, warranties, and enforcement mechanisms available to
investors and how they differ from the representations, warranties, and enforcement mechanisms in
issuances of similar securities. The SEC will also prescribe rules to require any originator to disclose
fulfilled repurchase requests across all trusts aggregated by the originator, so that investors may identify
asset originators with clear underwriting deficiencies.
This provision was included in the Treasury Department‘s legislative proposal. 235 Moody‘s
Investor Services described the use of representations and warranties and pointed out weaknesses in their
current usage:
[T]he seller or originator in structured securities makes representations and warranties regarding
the characteristics of the loans they sell into securitizations. In light of recent events, typical
representations and warranties should be strengthened. In addition to other matters, the seller
could provide representations and warranties to investors as to the quality and accuracy of all
information presented to investors, rating agencies and other market participants. The value of
representations and warranties is diminished when made by entities that are not financially strong,
as such entities may be less able to fulfill their obligation to repurchase loans that breach the
representations and warranties. 236
The Committee believes that enhanced disclosure will allow investors to better evaluate representations
and warranties and create incentives for issuers to insist that originators back up their representations and
warranties with real financial resources.
Section 944. Exempted Transactions Under the Securities Act of 1933
Section 944 removes the Securities Act of 1933 exemption of transactions involving offers or
sales of one or more promissory notes directly secured by a first lien on a single parcel of real estate upon
which is located a dwelling or other residential or commercial structure.
Section 945. Due Diligence Analysis and Disclosure in Asset-Backed Securities Issues
Section 945 directs the SEC to issue rules that require any issuer of an asset-backed security to
perform a due diligence analysis of the assets underlying the asset-backed security; and to disclose the
nature of this analysis. Professor John Coffee, in congressional testimony, called for action to ―reintroduce
due diligence into the securities offering process.‖ 237
Subtitle E
232 Regulating Hedge Funds and Other Private Investment Pools: Testimony before the Subcommittee on Securities, Insurance, and Investment of the U.S.
Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Joseph Dear).
233 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session (2009)(Testimony of Mr. Andrew Davidson).
234 Securitization of Assets: Problems and Solutions: Testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st
session, p. (2009)(Testimony of Dr. William Irving).
235 Title IX – Additional Improvements to Financial Markets Regulation Subtitle D, U.S. Department of the Treasury, 2009, www.financialstability.gov.
236 Moody's Proposes Enhancements to Non-Prime RMBS Securitization, Moody‘s, Special Report, p.2, September 25, 2007.
237 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.53 (2009)(Testimony of Professor John Coffee).
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Section 951. Shareholder Vote on Executive Compensation Disclosures
Section 951 provides that any proxy or consent or authorization for an annual or other meeting of
the shareholders will include a separate resolution subject to shareholder advisory vote to approve the
compensation of executives. The Committee believes that shareholders, as the owners of the corporation,
have a right to express their opinion collectively on the appropriateness of executive pay. The vote must
be tabulated and reported, but the result is not binding on the board or management.
In crafting this Section, there was consideration of alternative time intervals, such as votes every
three years, and of whether votes after the first year should be triggered only by a failure to receive a
minimum percentage of votes in support of the compensation plan. This provision would not preclude an
issuer from seeking more specific shareholder opinion through separate votes on cash compensation,
golden parachute policy, severance or other aspects of compensation.
A ―say on pay‖ proposal was included in the Treasury Department‘s legislative proposal. The
economic crisis revealed instances in which corporate executives received very high compensation despite
the very poor performance by their firms. For example, Mr. Charles O. Prince III, the former chief
executive of Citigroup, ―collected $110 million while presiding over the evaporation of roughly $64
billion in market value. He left Citigroup in November with an exit package worth $68 million, including
$29.5 million in accumulated stock, a $1.7 million pension, an office and assistant, and a car and a driver.
Citigroup's board also awarded him a cash bonus for 2007 worth about $10 million, largely based on his
performance in 2006 when the bank's results were better. Citigroup has announced write-offs worth
roughly $20 billion and its share has plummeted over 60 percent from last year's high.‖ 238
Ms. Ann Yerger, representing the Council of Institutional Investors, wrote in congressional
testimony for the Committee that ―the Council believes an annual, advisory shareowner vote on executive
compensation would efficiently and effectively provide boards with useful information about whether
investors view the company‘s compensation practices to be in shareowners‘ best interests. Nonbinding
shareowner votes on pay would serve as a direct referendum on the decisions of the compensation
committee and would offer a more targeted way to signal shareowner discontent than withholding votes
from committee members. They might also induce compensation committees to be more careful about
doling out rich rewards, to avoid the embarrassment of shareowner rejection at the ballot box. In addition,
compensation committees looking to actively rein in executive compensation could use the results of
advisory shareowner votes to stand up to excessively demanding officers or compensation consultants.‖ 239
The UK has implemented ―say on pay‖ policy. Professor John Coates in testimony for the Senate
Banking Committee stated that the UK‘s experience has been positive; ―different researchers have
conducted several investigations of this kind…These findings suggest that say-on-pay legislation would
have a positive impact on corporate governance in the US. While the two legal contexts are not identical,
there is no evidence in the existing literature to suggest that the differences would turn what would be a
good idea in the UK into a bad one in the US.‖
Other observers who support ―say on pay‖ include the Consumer Federation of America,
AFSCME, and the Investor‘s Working Group.
238 [―Chiefs‘ Pay Under Fire At Capitol,‖ The New York Times, March 8, 2008.
239 Protecting Shareholders and Enhancing Public Confidence by Improving Corporate Governance: Testimony before the Subcommittee on Securities,
Insurance, and Investment of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, 111 th Congress, 1 st session, (2009)(Testimony of Ms. Ann
Yerger).
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Section 952. Compensation Committee Independence
Section 952 directs the SEC to direct the national securities exchanges and national securities
associations to prohibit the listing of any security of an issuer that does not comply with independent
compensation committee standards. In determining whether a director is independent, the national
securities exchanges should consider the source of compensation of a member of the board of directors of
an issuer, including any consulting, advisory, or other compensatory fee paid by the issuer to such
member of the board of directors; and whether a member of the board of directors of an issuer is affiliated
with the issuer, a subsidiary of the issuer, or an affiliate of a subsidiary of the issuer. Any compensation
counsel or adviser shall be independent.
The issuer‘s proxy or consent materials must disclose whether the compensation committee has
used the advice of a compensation consultant and whether the committee has raised any conflict of
interest. However, the provision does not require the use of compensation consultants. The Section also
directs the SEC to conduct a study of the use of compensation consultants and their impact. The Treasury
Department‘s legislative proposal included an independent compensation committee.
The Council of Institutional Investors wrote in a letter to Senator Dodd ―Compensation
committees and their external consultants play a key role in the pay-setting process. Conflicts of interest
contribute to a ratcheting up effect for executive pay, however, and should thus be minimized and
disclosed. Reforms included in the discussion draft would help ensure that compensation committees are
free of conflicts and receive unbiased advice.‖
Section 953. Executive Compensation Disclosures
Section 953 directs the SEC to require each issuer to disclose in the annual proxy statement of the
issuer a clear description of any compensation required to be disclosed under the SEC executive
compensation forms and information that shows the relationship between executive compensation and the
financial performance of the issuers, taking into account the change in the value of the shares, dividends
and distributions. It has become apparent that a significant concern of shareholders is the relationship
between executive pay and the company‘s financial performance for the benefit of shareholders.
Shareholders are keenly interested when executive compensation is increasing sharply at the same time as
financial performance is falling.
The Committee believes that these disclosures will add to corporate responsibility as firms will
have to more clearly disclose and explain executive pay. Ms. Ann Yerger wrote in congressional
testimony on behalf of the Council of Institutional Investors ―of primary concern to the Council is full and
clear disclosure of executive pay. As U.S. Supreme Court Justice Louis Brandeis noted, ‗sunlight is the
best disinfectant.‘ Transparency of executive pay enables shareowners to evaluate the performance of the
compensation committee and board in setting executive pay, to assess pay-for-performance links and to
optimize their role of overseeing executive compensation through such means as proxy voting.‖
This disclosure about the relationship between executive compensation and the financial
performance of the issuer may include a clear graphic comparison of the amount of executive
compensation and the financial performance of the issuer or return to investors and may take many forms.
For example, a graph could have a horizontal axis of a number of years and a vertical axis with two
scales, one for executive compensation and a second for financial performance of the issuer for each year.
Section 954. Recovery of Erroneously Awarded Compensation
Section 954 requires public companies to have a policy to recover money that they erroneously
paid in incentive compensation to executives as a result of material noncompliance with accounting rules.
This is money that the executive would not have received if the accounting was done properly and was
110

not entitled to. This provision creates Section 10D of the Securities Exchange Act of 1934, which
requires the SEC to direct the national securities exchanges and national securities associations to prohibit
the listing of issuers who do not develop and implement a policy providing that, in the event that the
issuer is required to prepare an accounting restatement due to the material noncompliance, the issuer will
recover from any current or former executive officer of the issuer any compensation in excess of what
would have been paid to the executive officer had correct accounting procedures been followed. This
policy is required to apply to executive officers, a very limited number of employees, and is not required
to apply to other employees. It does not require adjudication of misconduct in connection with the
problematic accounting that required restatement.
The Committee believes it is unfair to shareholders for corporations to allow executives to retain
compensation that they were awarded erroneously. This proposal will clarify that all issuers must have a
policy in place to recover compensation based on inaccurate accounting so that shareholders do not have
to embark on costly legal expenses to recoup their losses or so that executives must return monies that
should belong to the shareholders. The Investor‘s Working Group wrote ―federal clawback provisions on
unearned executive pay should be strengthened.‖ 240
Section 955. Disclosure Regarding Employee and Director Hedging
Section 955 directs the SEC to require each issuer to disclose in the annual proxy statement
whether the employees or members of the board of the issuer are permitted to purchase financial
instruments that are designed to hedge or offset any decrease in the market value of equity securities
granted to employees by the issuer as part of an employee compensation. This will allow shareholders to
know if executives are allowed to purchase financial instruments to effectively avoid compensation
restrictions that they hold stock long-term, so that they will receive their compensation even in the case
that their firm does not perform. Dr. Carr Bettis has written that derivatives instruments ―provide a
mechanism that insiders can use to trade on inside information prior to adverse corporate events without the
level of transparency typically associated with open market sales.‖ 241
Section 956. Excessive Compensation by Holding Companies of Depository Institutions
Section 956 amends Section 5 of the Bank Holding Company Act of 1956 to establish standards
prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company that
provides an executive officer, employee, director, or principal shareholder with excessive compensation,
fees, or benefits; or could lead to material financial loss to the bank holding company. This applies
regulatory authority currently applicable to banks to their holding companies.
Section 957. Voting by Brokers
Section 957 amends the Securities Exchange Act of 1934 so that brokers who are not beneficial
owners of a security cannot vote through company proxies unless the beneficial owner has instructed the
broker to do so. The final vote tallies should reflect the wishes of the beneficial owners of the stock and
not be affected by the wishes of the broker that holds the shares.
Subtitle F
Section 961. Report and Certification of Internal Supervisory Controls
Section 961 directs the SEC to submit a report on SEC‘s conduct of examinations of registered
entities, enforcement investigations, and review of corporate financial securities filings to the House
Financial Services and Senate Banking Committees. Each report should contain an assessment of the
240 U.S. Financial Regulatory Reform: An Investor‘s Perspective, Investor‘s Working Group, July 2009.
241 See Bettis, Bizjak and Kalpathy, ―Insiders‘ Use of Hedging Instruments: An Empirical Examination,‖ March 2009.
111

SEC‘s internal supervisory controls and examination staff procedures; a certification of adequate
supervisory controls by the Directors of the Divisions of Enforcement, Division of Corporation Finance,
and Office of Compliance Inspection and Examinations; and a review by the U.S. Comptroller General
attesting to the adequacy and effectiveness of the internal supervisory control structure and procedures.
The purpose of this Section is to promote complete and consistent performance of SEC staff
examinations, investigations and reviews, and appropriate supervision of these activities, through internal
supervisory controls.
The massive fraud perpetrated by Bernard L. Madoff through a Ponzi scheme cost investors a
tremendous amount of money and went undetected through failures in SEC exams and investigations.
This illustrates the need for such internal supervisory controls. The failure of the SEC (or of FINRA) to
identify the fraud before Mr. Madoff confessed to his sons and to law enforcement seriously damaged
investor confidence in the effectiveness and competence of regulators. The Inspector General of the SEC,
Mr. David Kotz, testified before the Committee about his study of the SEC‘s failure to find the Madoff
fraud. The study found ―that the SEC received more than ample information in the form of detailed and
substantive complaints over the years to warrant a thorough and comprehensive examination and/or
investigation of Bernard Madoff and BMIS for operating a Ponzi scheme, and that despite three
examinations and two investigations being conducted, a thorough and competent investigation or
examination was never performed. The OIG found that between June 1992 and December 2008 when
Madoff confessed, the SEC received six substantive complaints that raised significant red flags
concerning Madoff‘s hedge fund operations and should have led to questions about whether Madoff was
actually engaged in trading. Finally, the SEC was also aware of two articles regarding Madoff‘s
investment operations that appeared in reputable publications in 2001 and questioned Madoff‘s unusually
consistent returns.‖ [IG Report pages 20-21]
Inspector General Kotz‘s comprehensive study found that on several occasions during more than a
decade, the SEC failed to perform what appear to be rudimentary procedures that could or would have
uncovered the Ponzi scheme. The Inspector General reported that the ―complaints all contained specific
information and could not have been fully and adequately resolved without thoroughly examining and
investigating Madoff for operating a Ponzi scheme.‖ [Page 22]. For example, the Inspector General
retained an expert to assist in the investigation and was told that ―the most critical step in examining or
investigating a potential Ponzi scheme is to verify the subject‘s trading through an independent third
party.‖ The OIG investigation ―found the SEC conducted two investigations and three examinations . . .
based upon the detailed and credible complaints that raised the possibility that Madoff was
misrepresenting his trading and could have been operating a Ponzi scheme. Yet, at no time did the SEC
ever verify Madoff‘s trading through an independent third-party.‖ The OIG found that the examinations
were ―too narrowly focused.‖ The OIG found that ―the examination teams . . . caught Madoff in
contradictions and inconsistencies. However they either disregarded these concerns or simply asked
Madoff about them. Even when Madoff‘s answers were seemingly implausible, the SEC examiners
accepted them at face value.‖ [page 23]
―In the first of the two OCIE examinations, the examiners drafted a letter to the National
Association of Securities Dealers . . . seeking independent trade data, but they never sent the letter,
claiming that it would have been too time-consuming to review the data they would have obtained. The
OIG‘s expert opined that had the letter to the NASD been sent, the data would have provided the
information necessary to reveal the Ponzi scheme. In the second examination, the OCIE Assistant
Director sent a document request to a financial institution that Madoff claimed he used to clear his trades,
requesting trading done by or on behalf of particular Madoff feeder funds during a specific time period,
and received a response that there was no transaction activity in Madoff‘s account for that period.
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However, the Assistant Director did not determine that the response required any follow-up . . . Both
examinations concluded with numerous unresolved questions and without any significant attempt to
examine the possibility that Madoff was misrepresenting his trading and operating a Ponzi scheme.‖ [page
24]
The ―Enforcement staff almost immediately caught Madoff in lies and misrepresentations, but failed
to follow up on inconsistencies. . . . When Madoff provided evasive or contradictory answers to
important questions in testimony, they simply accepted as plausible his explanations . . . They reached
out to the NASD and asked for information on whether Madoff had options positions on a certain date,
but when they received a report that there were in fact no options positions on that date, they did not take
further steps. An Enforcement staff attorney made several attempts to obtain documentation from
European counterparties (another independent third-party) and although a letter was drafted, the
Enforcement staff decided not to send it. Had any of these efforts been fully executed, they would have
led to Madoff‘s Ponzi scheme being uncovered.‖
In addition, the incidents of courts overturning SEC rulemakings in recent years calls into question
whether the process by which the SEC is promulgating final rules should be reexamined and refined. The
SEC‘s process for reaching settlement recommendations may need to be reexamined also, in light of the
recent decision of the Federal District Court in New York that rejected as inadequate a proposed $33
million settlement involving charges of securities fraud against Bank of America which it said "does not
comport with the most elementary notions of justice and morality . . . [and] suggests a rather cynical
relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the
Bank of America in a high-profile merger; the Bank's management gets to claim that they have been
coerced into an onerous settlement by overzealous regulators. And all of this is done at the expense, not
only of the shareholders, but also of the truth." 242 Columbia University Professor John C. Coffee has
expressed concerns about what he has seen as ―dysfunction in SEC enforcement practices.‖ 243
Section 962. Triennial Report on Personnel Management
Section 962 directs the GAO to submit a triennial report to the Committee on Banking, Housing,
and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives
on personnel management by the SEC. In the wake of the financial crisis, it is clear that the SEC, along
with other federal regulators, did not perform its duties as intended. The study would review several areas
that have been implicated, including supervision, competence, communication, turnover, and other areas,
with recommendations for improvements. Within 90 days the SEC will submit a report to these
congressional Committees describing what actions it has taken in response to the GAO report.
The SEC has been receiving increased amounts of funds and is expected to continue to do so. It is
critical that these funds be used efficiently and not wasted. These studies will promote the effective use of
resources.
Mr. Damon Silvers, Associate General Counsel of the AFL-CIO, wrote in congressional testimony
that ―The Commission should look at more intensive recruiting efforts aimed at more experienced private
sector lawyers who may be looking for public service opportunities.‖ 244
The Investor‘s Working Group wrote in their regulatory reform report ―Regulators should acquire
deeper knowledge and expertise. The speed with which financial products and services have proliferated
242 The case is Securities and Exchange Commission v. Bank of America Corp., 09-cv-06829, U.S. District Court, Souther District of New York (Manhattan).
243 The End of Phony Deterrence ‗SEC v. Bank of America‘, John C. Coffee, Jr., New York Law Journal, September 17, 2009.
244 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, pp.5-6 (2009)(Testimony of Mr. Damon A. Silvers).
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and grown more complex has outpaced regulators‘ ability to monitor the financial waterfront. Staffing
levels failed to keep pace with the growing work load, and many agencies lack staff with the necessary
expertise to grapple with emerging issues. Political appointees and senior civil service staff should have a
wide range of financial backgrounds. Compensation should be sufficient to attract top-notch talent. In
addition, continuing education and training should be dramatically expanded and officially mandated to
help regulators keep pace with innovation.‖ 245
The reports should address key management issues. Senator Merkley at the Madoff IG hearing
asked about SEC employees involved, ―Was there a general culture of a lack of curiosity, a lack of
wanting to inconvenience big players . . . What are the managerial issues‖ 246 Information in the SEC
Inspector General‘s report on the Madoff investigation raises concerns about whether some employees
who had been promoted to serve as mid-level supervisors had the judgment, commitment or temperament
to be effective supervisors. This suggests questions about the appropriateness of how employees are
promoted to supervisory positions. One indication of a supervisor‘s ineffectiveness may be high turnover
among subordinates. Related to this issue, the Committee notes that the Division of Enforcement will
eliminate the position of branch chief. The stated purpose ―is to streamline our management structure . . .
by redeploying our branch chiefs . . . to the heart-and-soul function of the SEC — conducting
investigations. This flattening of our management structure will increase the resources dedicated to our
investigative efforts, and will operate as a check on the extra process, duplication, unnecessary internal
review and the inevitable drag on decision-making that happens in any overly-managed organization.‖
The Committee sees this as a positive step, which suggests the question of whether there are excessive
numbers of low- or mid-level managers in other divisions and similar steps should be taken to improve
the effectiveness and better use the resources of those divisions.
Members of the Committee noted that it was some SEC employees‘ apparent incompetence that
allowed the Madoff fraud to continue for so long- a case of incompetence and not lack of resources or
legal authority. For example, Senator Menendez said that ―the SEC staff was, from everything I've read
of your report, grossly untrained, uncoordinated and lazy in their investigations.‖ He asked ―who's held
accountable for these grossly incompetent performances‖ 247 This raises a concern to review SEC
response to employees who fail to perform their duties. The IG report also identifies a concern that SECregulated
entitles have on many occasions brought informally to the attention of the Committee in other
contexts, that different offices within the Commission do not communicate effectively or, at times,
willingly, with each other to share expertise. Former SEC Chairman William Donaldson embarked upon
a project to ―tear down the silos‖ and promote more communication. Some regulated entitles have
informally complained to the Committee that the SEC inspectors arrive on their premises with a limited
knowledge of the business they are about to inspect, and ask the employees of the regulated entity to teach
them how their businesses operate. It would be appropriate for formal reviews of the efficiency of
communication between units of the Commission.
Since the concerns identified here, and related ones, have faced the Commission for many years, the
Committee feels it is important to have periodic studies by and recommendations from the GAO with the
goal of sustaining improvements at the Commission.
Section 963. Annual Financial Controls Audit
Section 963 directs the SEC to submit an annual report to Congress that describes the responsibility
245 U.S. Financial Regulatory Reform: An Investor‘s Perspective, Investor‘s Working Group, p.10, July 2009.
246 ―Oversight of the SEC‘s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance: Testimony before the U.S.
Senate Committee on Banking, Housing, and Urban Affairs‖, 111 th Congress, 1 st session, p.33 (2009) (Statement of Senator Jeff Merkley).
247 ―Oversight of the SEC‘s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance: Testimony before the U.S.
Senate Committee on Banking, Housing, and Urban Affairs‖, 111 th Congress, 1 st session, p.33 (2009) (Statement of Senator Robert Menendez).
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of the management of the SEC for establishing and maintaining an adequate internal control structure and
procedures for financial reporting; and contains an assessment of the effectiveness of the internal control
structure and procedures for financial reporting of the SEC during that fiscal year. This is intended to
improve the quality of the SEC‘s internal financial control structure.
The SEC administers the requirements under Section 404 of the Sarbanes-Oxley Act of 2002 that
public companies report on the effectiveness of their internal control structure and procedures for
financial reporting. Public companies need effective internal controls in order to produce accurate
financial reports, confidently plan their financial activities, and inspire the confidence of investors in the
integrity of public companies and in the securities markets.
As the Federal regulator of compliance with these requirements, it is appropriate for the SEC itself
to be an example and have an effective internal financial control structure and for that to be attested to.
Unfortunately, the SEC has been found to have material weaknesses in its own internal financial controls.
The GAO has reviewed the SEC‘s internal financial controls since 2004. In many of these reviews,
the GAO has found that the SEC has material weaknesses and needs improvement in their internal control
structure. GAO stated in November of 2009 that ―in GAO‘s opinion, SEC did not have effective internal
control over financial reporting as of September 30, 2009. … During this year‘s audit, we identified six
significant deficiencies that collectively represent a material weakness in SEC‘s internal control over
financial reporting. The significant deficiencies involve SEC‘s internal control over (1) information
security, (2) financial reporting process, (3) fund balance with Treasury, (4) registrant deposits, (5)
budgetary resources, and (6) risk assessment and monitoring processes. These internal control weaknesses
give rise to significant management challenges that have reduced assurance that data processed by SEC‘s
information systems are reliable and appropriately protected; impaired management‘s ability to prepare its
financial statements without extensive compensating manual procedures; and resulted in unsupported
entries and errors in the general ledger.‖ 248 Similarly, the GAO has found that the SEC did not have
effective internal controls over financial reporting as of September 30, 2004, 2005, and 2007.
Section 964. Report on Oversight of National Securities Associations
Section 964 provides that, once every three years, the GAO shall study and submit a report to
Congress on the SEC‘s oversight of national securities associations (NSA). The report is intended to
promote regular and effective oversight by the SEC of the NSA and to inform the Congress in its
oversight role of the Nation‘s securities markets. Such oversight is important to assist and promote the
NSA‘s performance of its mission and fair dealing with investors and members and to evaluate any public
concerns that arise.
It is the Committee‘s intent that the SEC should oversee specifically several important functions
which have been discussed in connection with the current market situation. These matters include an
evaluation of governance, including the identification and management of conflicts of interest, such as
those existing when an executive of a broker-dealer sits on an NSA board and the NSA enforces its rules
on such firms; examinations, including the evaluation of the expertise of staff; executive compensation
practices; the extent of cooperation with and responsiveness in providing assistance to State securities
administrators; funding; arbitration services, which may include enforcement of discovery rules and
fairness of selection process for arbitrators on the panel, and NSA review of member advertising.
Former SEC Chief Accountant Lynn Turner testified on March 10, 2009 that:
248 Securities and Exchange Commission‘s Financial Statements for Fiscal Years 2009 and 2008, GAO, ―Highlights,‖ November 2009.
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FINRA has been a useful participant in the capital markets. It has provided resources
that otherwise would not have been available to regulate and police the markets. Yet serious
questions have arisen that need to be considered when improving the effectiveness and
efficiency of regulation.
Currently the Board of FINRA includes representatives from those who are being
regulated. This is an inherent conflict and raises the question of whose interest the Board of
FINRA serves. To address this concern, consideration should be given to establishing an
independent board, much like what Congress did when it established the Public Company
Accounting Oversight Board.
In addition, the arbitration system at FINRA has been shown to favor the industry,
much to the detriment of investors. While arbitration in some instances can be a benefit, in
others it has been shown to be costly, time consuming, and biased to those who are
constantly involved with it. Accordingly, FINRA‘s system of arbitration should be made
optional, and investors given the opportunity to pursue their case in a court of law if they so
desire to do so.
Finally careful consideration should be given to whether or not FINRA should be
given expanded powers over investment advisors as well as broker dealers. FINRA‘s drop in
fines and penalties in recent years, and lack of transparency in their annual report to the
public, raises questions about its effectiveness as an enforcement agency and regulator. And
with broker dealers involved in providing investment advice, it is important that all who do
so are governed by the same set of regulations, ensuring adequate protection for the investing
public.
The Committee has received letters from groups that have raised numerous concerns about the
performance of FINRA, expressing concern that they ―have failed to prevent virtually all of the major
securities scandals since the 1980s,‖ their compensation packages for the organization's senior executives
are ―outrageous‖ for their large size, they failed to warn the public about auction rate securities and other
reasons. The Committee believes it is necessary for the GAO to conduct a study and issue a report on the
national securities associations given their important role in the market.
Section 965. Compliance Examiners
Section 965 directs the SEC Divisions of Trading and Markets and of Investment Management each
to have a staff of examiners to perform compliance inspections and examinations of entities under their
jurisdictions and report to the Director of the Division. This is intended to improve the effectiveness of
the SEC. This will provide each Division internally with experts in inspections and in the regulations of
that Division, who are closely acquainted with and have access to the staff who write and interpret those
regulations.
The Inspector General‘s report on the Madoff investigation and the testimony of Mr. Harry
Markopolos, for example, were critical of the competence and training of the examiners, including their
unwillingness to ask for information or expertise from someone in another SEC division. Mr. David G.
Tittsworth, Executive Director of the Investment Adviser Association, wrote in testimony for the Senate
Banking Committee that ―the SEC can and should improve its inspection program.‖ 249 Informal
information presented to the Committee from regulated entities has indicated that the Office of
249 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. David Tittsworth).
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Compliance Inspection and Examinations sometimes sends staff on examinations who have lacked
requisite expertise to examine complex registered financial or securities firms. As a result, the quality of
the exams appears to have suffered, the staff may have taken undue amounts of time to perform
inspections because they relied excessively on the employees of the firms being examined to teach them
about the business, and the reputation of the agency has suffered.
Section 966. Suggestion Program for Employees of the Commission
Section 966 directs the SEC Inspector General to establish a hotline for SEC employees to submit
suggestions for improvements in the efficiency, effectiveness, productivity and use of resources of the
SEC, as well as allegations of waste, abuse, misconduct or mismanagement within the SEC. The
Inspector General shall maintain as confidential the identity of a person who provides information unless
he or she requests otherwise in writing and any specific information at the person‘s request. The
Inspector General will report to Congress annually on the nature, number and potential benefits of the
suggestions of any suggestions; the nature, number and seriousness of any allegations; the Inspector
General‘s recommendations and actions taken in response to the allegations; and actions the SEC has
taken in response to the suggestions and allegations.
The SEC would benefit by having more meritorious suggestions from its employees on how to
improve efficiency and productivity. This is particularly important when the SEC will be receiving larger
budgets and after a period of increased public concerns about the agency‘s ineffective use of resources
raised in Madoff, restacking, and in other situations. It is not clear that the current system for attracting
suggestions to improve productivity has been producing a robust crop of meritorious suggestions.
The Committee expects that there will be review and appropriate action on meritorious suggestions.
The Inspector General may recognize an employee who makes a suggestion that would or does increase
efficiency, effectiveness or productivity at the SEC or reduces waste, abuse, misconduct or
mismanagement. The costs of this Suggestion Program shall be funded by the SEC Investor Protection
Fund. Nothing in this section limits other statutory authorities of the Inspector General.
This Program is placed within the Office of the Inspector General, which has a tradition of
analyzing agency activity to prevent abuse and promote effective operations. The IG already has a formal
system in place for receiving employee complaints which can be adapted to receive suggestions. Further,
the Office of Inspector General has a reputation for keeping employee confidences and is not in the
normal chain of command in the SEC, so that employees may feel more confident that they can offer
suggestions confidentially and without the risk of retaliation by a supervisor. The Inspector General is
sufficiently independent from the daily SEC staff interactions for employees to trust his impartiality in
deciding rewards. The Office of IG will have few potential conflicts of interest in reviewing suggestions
compared to other SEC offices. The Committee observes that the SEC already has the authority to run a
suggestion program and has discretion to make cash awards, so it would not need legislative authority to
do so.
The Committee has considered whether a Suggestion Program must offer monetary rewards that are
sufficiently large to motivate employees to make meritorious and valuable suggestions, and to overcome
fears of offending or annoying a supervisor or of retribution. The Committee hopes that the Suggestion
Program would motivate employees to produce meaningful suggestions for the benefit of the SEC.
Subtitle G
Section 971. Election of Directors by Majority Vote in Uncontested Elections
Section 971 provides that if a majority of a public company‘s shares are voted against or withheld
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from a nominee for director who runs uncontested, or without an opponent, he or she should be required
to resign, unless the board unanimously finds it is in the best interest of the shareholders for him or her to
serve and publishes its reasoning. It does this by requiring the SEC to direct the national securities
exchanges and national securities associations to prohibit the listing of any security of an issuer who has
on their board members that did not receive a majority vote in uncontested board elections, subject to an
exception if the directors unanimously voted that it is in the best interests of the shareholders that the
director serve.
The Committee believes that in the uncommon circumstance where a majority of shareholders
voting in an uncontested election prefer that a nominee not serve on the board, it is fair and appropriate
for their wishes to be honored. Currently, an uncontested nominee who receives even one vote would be
elected as a director of many companies.
The Committee has received many views on this matter. Former SEC Chief Accountant Lynn
Turner testified that Congress should ―[r]equire majority voting for directors and those who can‘t get a
majority of the votes of investors they are to represent should be required to step down.‖ 250 Ms. Barbara
Roper, Director of Investor Protection of the Consumer Federation of America also testified in favor of
requiring ―mandatory majority voting for directors.‖ 251 The Council of Institutional Investors, a
nonprofit association of public, union and corporate pension funds with combined assets that exceed $3
trillion, favors majority voting stating: ―Currently, the accountability of directors at most US companies is
severely weakened by the fact that shareowners do not have a meaningful vote in director elections.
Under most state laws, including Delaware, the default standard for uncontested elections is a plurality
vote, which means that a director is elected even if a majority of the shares are withheld from the
nominee. The Council has long believed that a plurality standard for the uncontested election of directors
is inherently unfair and undemocratic and should be replaced by a majority vote standard. In recent years,
many companies, including more than two-thirds of the S&P 500 have agreed with the Council and have
voluntarily adopted majority voting standards. At most public companies, however, plurality voting still
remains the rule. For example, nearly three-quarters of the companies in the Russell 3000 continue to use
a straight plurality voting standard for director elections. The benefits of moving to a majority voting
standard are many: it would democratize the corporate electoral process; put real voting power in the
hands of investors; and make boards more representative of shareowners. Simply stated, Section 971, if
enacted, would eliminate a fundamental flaw in the US governance model.‖ 252
The Committee has also heard from those who are concerned and believe that some directors who
fail to receive the vote of a majority of shareholders should nonetheless serve on the board. Such an
individual might be, for example, the board‘s only financial expert or a person with unique expertise.
The Committee has taken this type of concern into account. The legislation would allow a director
who received less than a majority of votes to serve on the board if the remaining board members
unanimously vote at a board meeting that it is in the best interests of the issuer and its shareholders not to
accept the resignation. When the issuer publishes this decision, it should include a specific discussion of
the board‘s analysis in reaching that conclusion. Such publication may be made in a filing made with the
SEC.
Section 972. Proxy Access
250 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Lynn Turner).
251 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Ms. Barbara Roper).
252 Letter to Chairman Dodd, March 19, 2010
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Section 972 was introduced by Senator Schumer. It gives the SEC the authority to require issuers to
allow shareholders to put Board nominees on the company proxy. It does not require the SEC to engage
in rulemaking. The authority gives the SEC wide latitude in setting the terms of such proxy access.
The Committee intentionally did not specify that shareholders must have held a certain number of
shares or have held shares for a particular period of time to be eligible to use the proxy. If the SEC
proposes rules, interested persons can offer their views on the appropriateness of proposed regulatory
terms in the public comment process.
The Committee feels that it is proper for shareholders, as the owners of the corporation, to have the
right to nominate candidates for the Board using the issuer‘s proxy under limited circumstances.
Former SEC Chairman Richard Breeden testified before the Committee in favor of one form of
proxy access and recommended to ―Allow the five (or ten) largest shareholders of any public company
who have owned shares for more than one year to nominate up to three directors for inclusion on any
public company‘s proxy statement. Overly entrenched boards have widely failed to protect shareholder
interests for the simple reason that they sometimes think more about their own tenure than the interests of
the people they are supposed to be protecting . . . This provision would give ‗proxy access‘ to shareholder
candidates without the cost and distraction of hostile proxy contests. At the same time, any such
nomination would require support from a majority of shares held by the largest holders, thereby
protecting against narrow special interest campaigns. This reform would make it easier for the largest
shareowners to get boards to deal with excessive risks, poor performance, excessive compensation and
other issues that impair shareholder interests.‖ Ms. Barbara Roper, Director of Investor Protection of
Consumer Federation of America, testified before the Committee and recommended ―improved proxy
access for shareholders.‖ Mr. Jeff Mahoney, General Counsel of the Council of Institutional Investors,
wrote in a letter to Chairman Dodd that ―the only way that shareowners can present alternative director
candidates at a U.S. public company is by waging a full-blown election contest. For most investors, that is
onerous and prohibitively expensive. A measured right for investors to place their nominees for directors
on the company‘s proxy card would overcome these obstacles, invigorating board elections and making
directors more responsive, thoughtful and vigilant.‖ Former SEC Chief Accountant Lynn Turner testified
before the Committee that ―Congress should move to adopt legislation that would: …Give investors who
own the company, the same equal access to the proxy as management currently has.‖ A coalition of state
public officials in charge of public investments, AFSCME, CalPERS, and the Investor‘s Working Group
also support proxy access.
Section 973. Disclosures Regarding Chairman and CEO Structures
Section 973 directs the SEC to issue rules that require an issuer to disclose the reasons that it has
chosen the same person or elected to have different people serve in the offices of Chairman of the Board
of Directors and Chief Executive Officer of the issuer.
The Committee has received strong views on the merits of one or the other model and on whether to
prohibit a public company from having the same individual serve as Chairman and as CEO. For
example, Mr. Joseph Dear, Chief Investment Officer of the California Public Employees‘ Retirement
System, on behalf of the Council of Institutional Investors, wrote in testimony for the Senate Banking
Committee that ―Boards of directors should be encouraged to separate the role of chair and CEO, or
explain why they have adopted another method to assure independent leadership of the board.‖
The Committee feels this is an important matter, and recognizes that different public companies
may have good reasons for having the same person as CEO and Chairman or different persons in these
two positions. Accordingly, the legislation asks public companies to disclose to shareholders the reasons
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why it has chosen its governance method. The legislation does not endorse or prohibit either method.
Subtitle H
Section 975. Regulation of Municipal Securities and Changes to the Board of the MSRB
Section 975 strengthens oversight of municipal securities and broadens current municipal securities
market protections to cover previously unregulated market participants and previously unregulated
financial transactions with states, counties, cities and other municipal entities. This section establishes
municipal advisors as a new category of SEC registrant. Such municipal advisors provide advice to
municipal entities on the issuance of municipal securities, the use of municipal derivatives, and
investment advice relating to bond proceeds.
Mr. Timothy Ryan, President and CEO of SIFMA, in testimony before the Committee, said: ―we
feel it is important to level the regulatory playing field by increasing the Municipal Securities Rulemaking
Board‘s authority to encompass the regulation of financial advisors, investment brokers and other
intermediaries in the municipal market to create a comprehensive regulatory framework that prohibits
fraudulent and manipulative practices; requires fair treatment of investors, state and local government
issuers of municipal bonds and other market participants; ensures rigorous standards of professional
qualifications; and promotes market efficiencies.‖ 253 Mr. Ronald A. Stack, Chair of the Municipal
Securities Rulemaking Board (MSRB), wrote in testimony for the Senate Banking Committee:
Investors in the municipal securities market would be best served by subjecting unregulated
market professionals to a comprehensive body of rules that (i) prohibit fraudulent and
manipulative practices, (ii) require the fair treatment of investors, issuers, and other market
participants, (iii) mandate full transparency, (iv) restrict real and perceived conflicts of interests,
(v) ensure rigorous standards of professional qualifications, and (vi) promote market
efficiencies. 254
The U.S. Council of Mayors 255 also testified in support of this policy.
The SEC recently proposed new rules under the Investment Advisers Act of 1940 relating to the
provision by registered investment advisers of investment advisory services to municipal entities in
which, among other things, the SEC proposed prohibiting investment advisers from making payments to
unrelated persons for solicitation of municipal entities for investment advisory services on behalf of
investment advisers. Rather than effectively prohibiting such third-party solicitation for investment
advisory services, this section would provide that activities of a municipal advisor, broker, dealer or
municipal securities dealer to solicit a municipal entity to engage an unrelated investment adviser to
provide investment advisory services to a municipal entity or to engage to undertake underwriting,
financial advisory or other activities for a municipal entity in connection with the issuance of municipal
securities, would be subject to regulation by the MSRB. These activities of municipal advisors are
currently unregulated in most respects and would become subject to regulation by the MSRB to the same
extent as would such activities undertaken by brokers, dealers and municipal securities dealers with
respect to their transactions in municipal securities. Thus, the MSRB would be authorized to establish
qualification requirements, continuing education and operational standards, and fair practice, disclosure,
253 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, pp.9-10 (2009)(Testimony of Mr. Timothy Ryan).
254 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.25 (2009)(Testimony of Mr. Ronald A. Stack).
255 Legislative Proposals to Improve the Efficiency and Oversight of Municipal Finance: Testimony before the U.S. House Committee on Financial Services,
111 th Congress, 1 st session (2009)(Testimony of The Honorable Thomas C. Leppert).
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conflict of interest and other rules with respect to municipal advisors in the same manner as for brokers,
dealers and municipal securities dealers.
Section 975 authorizes the MSRB to make rules regulating municipal advisors, including financial
advisors, brokers of guaranteed investment contracts and other investments, swap and other municipal
derivatives advisors, and certain third party solicitors of municipal entities. The Committee believes that
giving MSRB rulemaking authority in this area is an efficient use of regulatory resources, particularly
since the SEC currently has very few staff with expertise in municipal securities. Not only does the
MSRB have greater resources in terms of personnel and experience in the municipal market. The Board
has an existing, comprehensive set of rules on key issues such as pay-to-play and fair dealing. Therefore,
the Committee is of the view that consistency would be important to ensure common standards. As a
baseline for rulemaking with respect to municipal advisors, the MSRB has an extensive understanding of
the municipal securities market and has put in place a mature body of comprehensive regulation that (i)
prohibits fraudulent and manipulative practices, (ii) requires the fair treatment of investors, issuers and
other market participants, (iii) mandates full transparency, (iv) restricts real and perceived conflicts of
interests, including prohibiting pay-to-play practices, (v) ensures rigorous standards of professional
qualifications, and (vi) promotes market efficiencies. The rules for municipal advisory activities would
apply equally to broker-dealers acting as financial advisors and to non-affiliated financial advisors. The
Committee also notes that the MSRB has made important contributions to the transparency of the
municipal market with its EMMA online reporting system.
The SEC has general oversight authority over the MSRB, and would enforce the municipal
advisor rules issued pursuant to this section. The MSRB's rulemaking process, including a public
comment process and SEC approval of all new rules, provides another layer of protection regarding the
appropriateness of rules written by the MSRB. The section creates an expanded role for the MSRB in
supporting SEC examinations and enforcement; gives the MSRB a share of fines collected by the SEC
and FINRA; and gives the MSRB authority to be an information repository for the systemic risk regulator.
This section also modifies the composition of the MSRB, in light of the expansion of the Board‘s
jurisdiction and to avoid conflicts of interest. Under current law, 10 of the 15 board members represent
the securities dealers and underwriters that are regulated by the MSRB. With the expansion of the
MSRB‘s jurisdiction to include municipal advisors, it is appropriate to provide for majority public
representation. The section provides that the MSRB shall include 8 individuals who are not associated
with broker-dealers, municipal advisors, or municipal securities dealers, and 7 individuals who are
associated with broker-dealers, municipal advisors, or municipal securities dealers. The 8 public members
will include at least one investor representative, one representative of municipalities, and a member of the
public with knowledge or experience in the municipal securities field. As reconstituted under this Section,
the MSRB would not be dominated by members having exclusive legal obligations to investors, given the
requirement for majority public membership as well as required representation of regulated municipal
advisors. Further, the section would establish an explicit MSRB statutory mandate to protect municipal
entities, as well as investors.
The Section also provides that the MSRB, in conjunction with or on behalf of other Federal
financial regulators or self-regulatory organizations, may establish information systems and assess
reasonable fees to support those information systems.
Section 976. Government Accountability Office Study of Increased Disclosure to Investors
Section 976 directs the GAO to conduct a study and review of the disclosure required to be made
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y issuers of municipal securities and report on the findings. The GAO will describe the size of the
municipal securities markets and the issuers and investors; compare the disclosure regimes applicable to
issuers of municipal versus corporate bonds; evaluate the costs and benefits to issuers of municipal
securities of requiring additional financial disclosures to investors; and make recommendations relating to
the repeal of the Tower Amendment, which bars the MSRB and the SEC from imposing disclosure
requirements on municipal issuers.
The Committee believes that to improve investor protection there is merit in considering the
revocation of the Tower Amendment, but that this move is significant and deserves a deliberate study
before action is taken. In support of repealing the Tower amendment, former SEC Chief Accountant Lynn
Turner wrote in testimony for the Senate Banking Committee ―there is a gap in regulation of the
municipal securities market as a result of what is known as the Tower Amendment. Recent SEC
enforcement actions such as with the City of San Diego, the problems in the auction rate securities, and
the lurking problems with pension obligation bonds, all cry out for greater regulation and transparency in
these markets. As a result, these token regulated markets now amount to trillions of dollars and significant
risks. Accordingly, as former Chairman Cox recommended, I believe Section 15B(d) — Issuance of
Municipal Securities — of the Securities Act of 1934 should be deleted.‖ 256 The Investment Company
Institute, 257 Municipal Market Advisers, 258 and former SEC Chairman Arthur Levitt 259 support increased
disclosure by municipalities.
Section 977. Government Accountability Office Study on the Municipal Securities Markets
Section 977 directs the GAO to conduct a study and issue a report on the municipal securities
markets, to include an analysis of the mechanisms for trading, reporting, and settling transactions; the
needs of the markets and investors and the impact of recent innovations; potential uses of derivatives in
the municipal markets; and recommendations to improve the transparency, efficiency, fairness, and
liquidity of the municipal securities market. The GAO shall submit its report to the Committee on
Banking, Housing, and Urban Affairs of the Senate, the Financial Services Committee of the House of
Representatives, with a copy to the Special Committee on Aging of the Senate, within 180 days of the
enactment of this Act.
Section 978. Study of Funding for Government Accounting Standards Board
Section 978 requires the SEC to study the funding of the Government Accounting Standards
Board (GASB). GASB establishes accounting principles that are used by many states and local
governments. As a result, GASB plays an important role in the municipal securities market by providing
the foundation for financial reporting that investors rely on to make investment decisions. GASB is
currently funded by voluntary contributions from states, local governments, and the financial community,
and through the sale of its publications, to meet its annual budget of less than $8 million.
The Committee is concerned that such voluntary funding arrangements can cause undue
uncertainty and potentially lead to the compromise of the GASB standard setting process. The Banking
Committee faced and solved a similar problem in 2002, when the Financial Accounting Standards Board,
which had been relying on voluntary contributions and materials sales, was given a secure funding
mechanism through Section 109 of the Sarbanes-Oxley Act.
256 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session, p.11 (2009)(Testimony of Mr. Lynn Turner).
257 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Paul Schott Stevens).
258 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Thomas G. Doe).
259 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Arthur Levitt).
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The municipal securities market is an important component of the Nation‘s capital markets, as it
finances infrastructure and other government needs, while at the same time providing generally low-risk
investment opportunities to Americans. There are over 50,000 issuers of municipal securities, with more
than $2.8 trillion of United States municipal securities outstanding. In 2008, over $450 billion new
municipal securities were issued and nearly $5 trillion in municipal securities were traded.
In this regard, the Committee is concerned that the current funding mechanism may not ensure that
GASB can produce high-quality, unbiased, and transparent governmental accounting and financial
reporting standards.
This section requires the SEC to conduct a study that evaluates: the role and importance of GASB
in the municipal securities markets; the manner in which GASB is funded and how such manner of
funding affects the financial information available to securities investors; the advisability of changes to
the manner in which GASB is funded; and whether legislative changes to the manner in which GASB is
funded are necessary for the benefit of investors and in the public interest. In conducting the study, the
SEC shall consult with State and local government officers.
In considering the ―advisability‖ of changes to the funding, the Committee expects the SEC to
evaluate alternative methods, including methods that would provide GASB with certainty about its
income to meet its budget. In addition, the SEC may consider whether it would be feasible or efficient
for a private entity, such as a self-regulatory organization, to assess a fee from its members that
underwrite municipal securities offerings or whether it would be appropriate to assess fees on secondary
market transactions. The SEC is required to submit the study to the Committee on Banking, Housing, and
Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives
within 270 days of the date of enactment.
Section 979. Commission Office of Municipal Securities
Section 979 establishes an Office of Municipal Securities in the SEC to administer the
Commission‘s rules with respect to municipal securities dealers, advisors, investors, and issuers. The
Director of the Office shall report to the Chairman of the Commission. The Office shall coordinate with
the MSRB for rulemaking and enforcement actions, and shall have sufficient staff to carry out the
requirements of this section, including individuals with knowledge and expertise in municipal finance.
The Committee is concerned that the SEC has reduced the number of staff in its municipal securities
office over the past few decades, and expects that the creation of the Office will allow the SEC to devote
increased supervisory attention to the municipal market.
Subtitle I
Section 981 Authority to Share Certain Information with Foreign Authorities
Section 102(a) of the Sarbanes-Oxley Act of 2002 ("the Act") makes it unlawful for any public
accounting firm to prepare or issue, or participate in the preparation or issuance, of any audit reports with
respect to any issuer without being registered with the Public Company Accounting Oversight Board
("PCAOB"). As of January 1, 2010, 2,349 firms were registered with the PCAOB, including 936 firms in
88 non-U.S. jurisdictions. Many of those non-U.S. firms regularly provide audit reports for issuers and
are therefore inspected by the PCAOB on a regular basis. As of March 31, 2010, the Board has conducted
226 non-U.S. inspections located in 33 jurisdictions.
In conducting inspections abroad, the Board has sought to coordinate and cooperate with local
authorities. The Board has said that its cooperative efforts have been impeded by the Board‘s inability to
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share with its non-U.S. counterparts confidential information related to the Board‘s oversight activities.
The list of authorities that may receive such information is limited to the SEC, the Attorney General of the
United States, appropriate federal functional regulators, state attorneys general in connection with
criminal investigations, and appropriate state regulatory agencies (such as state boards of accountancy).
These provisions, therefore, limit the PCAOB's ability to share such information with other regulators,
including non-U.S. regulators.
A significant number of non-U.S. audit regulators have cited this limitation as a reason for not
cooperating with PCAOB inspections and discouraging or prohibiting PCAOB-registered firms in their
jurisdictions from cooperating. For example, the EU Directive on statutory audits permits cooperation
only if reciprocal working relationships have been established between the member state‘s audit regulator
and the PCAOB. The European Commission has asserted that these working relationships require that the
PCAOB and the EU member state‘s auditor regulator be able to engage in a mutual exchange of
inspection related information including audit working papers.
Section 981 will allow the PCAOB to share confidential inspection and investigative information
with foreign audit oversight authorities under specified circumstances. . The sharing may occur if (1) the
PCAOB makes a finding that it is necessary to accomplish the purposes of the Act of to protect investors
in U.S. issuers; (2) the foreign authority has: provided the assurances of confidentiality requested by the
PCAOB, described its information systems and controls; described its jurisdiction‘s laws and regulation
that are relevant to information access and (3) the PCAOB determines it is appropriate to share such
information. The information about information controls and relevant law is to assist the PCAOB in
making an independent determination that the foreign authority has the capability and authority to keep
the information confidential in its jurisdiction. The PCAOB may rely on additional information in
making the determining that the information will be kept confidential and used no more extensively than
the same manner that the U.S. and State entities identified in Section 105(b)(5)(B) of the Act may use the
information, which is an important consideration of determining the appropriateness of such sharing.
Thus, the bill requires the Board to consider whether applicable foreign laws and the respective
foreign auditor oversight authority offer protections comparable to those provided under the Act. This
would require the PCAOB to consider not only the foreign auditor oversight authority's willingness to
maintain the confidentiality of the information, but also its ability to do so, both as a matter of the law in
its jurisdiction and as a matter of the security of its information technology systems. The Committee
believes that the Board could accept an assurance of confidentiality as adequate even in circumstances
where the foreign auditor oversight authority could disclose the information to relevant law enforcement
or regulatory authorities in its jurisdiction, so long as any such authorities are also committed and able to
comply with confidentiality limitations comparable to those that apply to the U.S. and state entities with
which the Board shares information under Section 105(b)(5)(B) of the Act.
The Chairman of the PCAOB has written to the Chairman and Ranking Member asking for
legislation ―to allow the PCAOB to share with a foreign audit oversight authority, upon receiving
appropriate assurances of confidentiality, the inspection and investigative information related to the public
accounting firms within that authority's jurisdiction . . . [in order to] facilitate the Board's and foreign
authorities' efforts to fulfill their inspection mandates. This recommendation enjoys widespread investor
and profession support.‖ 260
Section 982. Oversight of Brokers and Dealers
Section 982 provides the Public Company Accounting Oversight Board (―PCAOB‖) with the
260 Letter from the Honorable Mark W. Olson, July 7, 2009
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authority to write professional standards related to audits of SEC-registered brokers and dealers, to inspect
those audits, and, when appropriate, to investigate and bring disciplinary proceedings related to those
audits. This Section provides the PCAOB with authority over audits of registered brokers and dealers that
is generally comparable to its existing authority over audits of issuers. This authority permits it to write
standards for, inspect, investigate, and bring disciplinary actions arising out of, any audit of a registered
broker or dealer. It enables the PCAOB to use its inspection and disciplinary processes to identify
auditors that lack expertise or fail to exercise care in broker and dealer audits, identify and address
deficiencies in their practices, and, where appropriate, suspend or bar them from conducting such audits.
Currently, every SEC-registered broker and dealer is required by section 17(e)(1)(A) of the
Securities Exchange Act of 1934 (15 U.S.C. 78q(e)(1)(A)) to file with the SEC a balance sheet and
income statement certified by a public accounting firm that is registered with the PCAOB. However, the
PCAOB‘s authority to write professional standards, inspect audits, investigate audit deficiencies, and
bring disciplinary proceedings for audit deficiencies extends to audits of ―issuers,‖ as defined in section
2(a)(7) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7201(7)). Therefore, the PCAOB does not have the
authority to regulate and inspect audits of brokers and dealers unless a broker or dealer is an issuer (which
is typically not the case) or its financial statements are part of the consolidated financial statements of an
issuer.
Under the current situation, where auditors of brokers and dealers register with the PCAOB but
their audits of brokers and dealers are not subject to the PCAOB‘s standard setting, inspection and
disciplinary authority, investors may expect that PCAOB-registered auditors of brokers and dealers are
subject to inspections and oversight when, in fact, the PCAOB has no authority to govern the conduct or
monitor the quality of their audit work.
In a July 7, 2009 letter to Chairman Dodd and Ranking Member Shelby, Chairman Mark Olson of
the PCAOB recommended that Congress consider amending the Sarbanes-Oxley Act to grant the PCAOB
authority to inspect audits of brokers and dealers and to take action where deficiencies occur. The
Securities Investor Protection Corporation has supported granting the PCAOB full oversight of audits of
brokers and dealers, and feels that the PCAOB‘s new oversight authority should apply to audits of all
registered brokers and dealers and not only those that perform a clearing function or carry customer
accounts.
The Section requires the PCAOB to allocate, assess and collect its support fees among brokers and
dealers as well as issuers. The Committee expects that the PCAOB will reasonably estimate the amounts
required to fund the portions of its programs devoted to the oversight of audits of brokers and dealers, as
contrasted to the oversight of audits of issuers, in deciding the total amounts to be allocated to, assessed,
and collected from all brokers and dealers. The Committee notes that the implementation of a program
for PCAOB inspections of auditors of brokers and dealers is not intended to and should not affect the
PCAOB‘s program for the inspections of auditors of issuers. Cost accounting for each program is not
required.
An example of the type of harm that might be avoided in the future by extending PCAOB authority
is the investor reliance on the fraudulent audit of the broker-dealer Bernard L. Madoff Investment
Securities LLC by Friehling & Horowitz, a firm that was not registered with the PCAOB.
Columbia University Law Professor John C. Coffee testified before the Banking Committee on
March 10, 2009: ―From this perspective focused on prevention, rather than detection, the most obvious
lesson is that the SEC‘s recent strong tilt towards deregulation contributed to, and enabled, the Madoff
fraud in two important respects. First, Bernard L. Madoff Investment Securities LLC (―BMIS‖) was
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audited by a fly-by-night auditing firm with only one active accountant who had neither registered with
the Public Company Accounting Oversight Board (―PCAOB‖) nor even participated in New York State‘s
peer review program for auditors.‖
Professor Coffee noted that the Sarbanes-Oxley Act ―required broker-dealers to use a PCAOBregistered
auditor. 97 Nonetheless, until the Madoff scandal exploded, the SEC repeatedly exempted
privately held broker-dealers from the obligation to use such a PCAOB-registered auditor and permitted
any accountant to suffice. 98 Others also exploited this exemption. For example, in the Bayou Hedge Fund
fraud, which was the last major Ponzi scheme before Madoff, the promoters simply invented a fictitious
auditing firm and forged certifications in its name. Had auditors been required to have been registered
with PCAOB, this would not have been feasible because careful investors would have been able to detect
that the fictitious firm was not registered . . . At the end of 2008, the SEC quietly closed the barn door by
failing to renew this exemption – but only after $50 billion worth of horses had been stolen.‖
Section 983 – Portfolio Margining
Section 983 amends the Securities Investor Protection Act of 1970 (―SIPA‖), which protects
customers from certain losses caused by the insolvency of their broker-dealer. Under SIPA, claims of
customers take priority over claims of general unsecured creditors with respect to customer property held
by an insolvent broker-dealer. Under current law, the protections of SIPA do not extend to futures
contracts other than security futures. As a result, customers currently are effectively precluded from
including securities and related futures in a single securities account.
The Section will enable customers to benefit from hedging activities by facilitating the inclusion of
both securities and related futures products in a single ―portfolio margining account‖ provided for under
rules of self-regulatory organizations approved by the Securities and Exchange Commission (the ―SEC‖).
A portfolio margining account can be margined based upon the net risk of the positions in the account.
Section 983 is consistent with a recommendation of the SEC and CFTC in their Joint Report on
Harmonization of Regulation released on October 16, 2009. The agencies recommended giving
customers the choice of whether to put related futures in a securities account or their related securities
derivatives in a futures account. Customer choice is facilitated by extending SIPC insurance to futures in
a securities portfolio margining account. The Section is also supported by each of the U.S. exchanges that
trade options.
Section 983 amends the definitions of ―customer,‖ ―customer property,‖ and ―net equity‖ in Section
16 of SIPA to provide that the owner of a portfolio margining account would be given the priority of a
customer under SIPA with respect to any futures contracts or options on futures contracts permitted under
SEC-approved rules to be carried in the account. Similarly, the customer‘s ―net equity‖ in the account
would include such futures and options on futures, and they would be treated along with cash and
securities in the account as securities customer property. The definition of ―net equity‖ is further
amended to clarify that a customer‘s claim for either a commodity futures contract or a security futures
contract will be treated as a claim for cash rather than as a claim for a security. The Section also amends
the definition of ―gross revenues from the securities business‖ to specifically include revenues earned by a
broker or dealer in connection with transactions in portfolio margining accounts carried as securities
accounts.
Section 984. Loan or Borrowing of Securities
During the period preceding the crisis, a number of financial institutions used securities lending
programs as a basis for leveraged and risky trading activities. This Section directs the SEC to write rules
that are designed to increase the transparency of information available to brokers, dealers, and investors
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with respect to loaned or borrowed securities within two years of the date of enactment of this Act. The
Section also makes it unlawful for any person to effect, accept, or facilitate a transaction involving the
loan or borrowing of securities in contravention of such rules as the SEC may prescribe. The SEC is
encouraged to act in a shorter period of time if necessary in the public interest.
Section 985. Technical Corrections to Federal Securities Laws
Section 986. Conforming Amendments Relating to the Repeal of the Public Utility
Holding Company Act of 1935
Section 987. Amendment to Definition of Material Loss and Nonmaterial Losses to the Deposit
Insurance Fund for Purposes of Inspector General Reviews
Section 987 amends the definition of material loss and adds ―nonmaterial losses‖ definition to the
Deposit Insurance Fund for purposes of Inspector General Reviews. The Inspectors General (IG) of
Federal Banking Regulators are required to conduct a Material Loss Review for each depository
institutions that fails and costs the Deposit Insurance Fund $25 million and more. The Senate Banking
Committee has heard from the IGs that due to the rise in bank failures they are severely strained by the
amount of Material Loss Reviews they must produce. In their communications to the Banking Committee
the IGs from Federal Reserve, Treasury and FDIC have claimed to have hired more personnel to reduce
the backlog accumulated during the financial crisis, however, the number of bank failures has also been
more than they‘ve expected, and such, the volume of workload has remained strenuously high. Because of
this, and the understanding that most of the bank failures seemed have occurred due to similar reasons
(exposure to failing mortgages) the Committee is proposing an increase in the dollar amount that the
Deposit Insurance Fund must lose to trigger a Material Loss Review. The change will follow this
schedule: it will rise from the current $25,000,000 to $100,000,000 for the period of September 30, 2009
to December 31, 2010 and cascade down to $75,000,000 for the period of January 1, 2011 to December
31, 2011, and rest on $50,000,000 for January 1, 2012 and after. In bank failures that do not meet the
materiality threshold (and thus are ―nonmaterial losses‖ to the Deposit Insurance Fund), the IGs could still
conduct a Material Loss Review if, based on their preliminary assessment, such a report would be helpful.
For every 6 months period after March 31, 2010, the IGs must prepare and submit a written report
to the appropriate Federal banking agency and to Congress on whether any losses deemed to be
nonmaterial exhibit unusual circumstances and deserve an in-depth review of the loss.
Section 988. Amendment to Definition of Material Loss and Nonmaterial Losses to the National
Credit Union Share Insurance Fund for Purposes of Inspector General Reviews
Section 988 does for credit unions what Section 987 does for other insured depository institutions.
The Section defines a material loss for the National Credit Union Share Insurance Fund for purposes of
Inspectors General reviews. If the Fund incurs a material loss with respect to an insured credit union, the
Inspector General of the NCUA Board will submit to the Board a written report reviewing the supervision
of the credit union by the Administration. For the purposes of this provision, a material loss is defined as
an amount exceeding the sum of $25,000,000 or an amount equal to 10 percent of the total assets of the
credit union on the date on which the Board initiated assistance. The GAO, under its discretion, could
review each of these reports and recommend improvements to the supervision of insured credit unions.
For every 6 months period after March 31, 2010, the Board IG must prepare and submit a written
report to the appropriate Federal banking agency and to Congress on whether any losses deemed to be
nonmaterial exhibit unusual circumstances and deserve an in-depth review of the loss.
Section 989. Government Accountability Office Study on Proprietary Trading
Section 989A was authored by Senator Merkley. Section 989 directs the GAO to conduct a study
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on proprietary trading by financial institutions and the implication of this practice on systemic risk. This
will include an evaluation of whether proprietary trading presents a material systemic risk to the stability
of the United States financial system; whether proprietary trading presents material risks to the safety and
soundness of the covered entities that engage in such activities; whether proprietary trading presents
material conflicts of interest between covered entities that engage in proprietary trading and the clients of
the institutions who use the firm to execute trades or who rely on the firm to manage assets; whether
adequate disclosure regarding the risks and conflicts of proprietary trading is provided to the depositors,
trading and asset management clients, and investors of covered entities that engage in proprietary trading;
and whether the banking, securities, and commodities regulators of institutions that engage in proprietary
trading have in place adequate systems and controls to monitor and contain any risks and conflicts of
interest related to proprietary trading. The GAO will submit a report to Congress on the results of this
study within 15 months of passage of the Act.
Section 989A. Senior Investor Protection
Section 989A was authored by Senator Kohl. Section 989A defines the terms ―misleading
designation‖, ―financial product‖, ―misleading or fraudulent marketing‖ and ―senior‖ for the purposes of
protecting senior citizens from investment frauds. The Section directs the Office of Financial Literacy
within Bureau of Consumer Financial Protection to establish a program to provide grants of up to
$500,000 per fiscal year to individual States to investigate and prosecute misleading and fraudulent
marketing practices or to develop educational materials and training to reduce misleading and fraudulent
marketing of financial products toward seniors. States may use the grants for staff, technology,
equipment, training and educational materials. To receive these grants, states must adopt rules on the
appropriate use of designations in the offer or sale of securities or investment advice; on fiduciary or
suitability requirements in the sale of securities; on the use of designations in the sale of insurance
products; and on insurer conduct related to the sale of annuity products. This Section authorizes $8
million to be appropriated for these purposes for fiscal years 2010 through 2014.
This section is intended to protect seniors from less than scrupulous financial advisors who prey
on the elderly by touting misleading or fraudulent ―senior designations.‖ Often these deceptive
designations can be obtained online and require little or no training to acquire. The new grant program
will provide needed resources to state fraud enforcement agencies fighting fraud. The grant application
process will incentivize states to crack down against the misleading use of senior designations by
encouraging them to adopt the North American Securities Administrators Association (NASAA)‘s and
the National Association of Insurance Commission‘s (NAIC) newly developed model rules on the use of
senior designations for the sale of securities and insurance products. The grant also calls for improved
suitability standards for the sales of annuity products, with provisions that are likely to be reflected in the
new suitability standards that are being developed by the NAIC. This section has been endorsed by
organizations such as the AARP, North American Securities Administrators Association (NASAA),
National Organization for Competency Assurance (NOCA), The American College, Financial Planners
Association, Fund Democracy, Consumer Federation of America, Alliance for Retired Americans,
National Association of Personal Financial Advisors (NAPFA), Older Women‘s League (OWL) and
Financial Certified Planners Board of Standards (CFP Board).
Section 989B. Changes in Appointment of Certain Inspectors General
Senator Menendez authored this Section, which provides for presidential appointment of the
Inspectors General of the Federal Reserve Board of Governors, the CFTC, the NCUA, the PBGC, the
SEC, and the Bureau of Consumer Financial Protection with Senate approval. The provision is intended to
increase the stature of the Inspectors General within their agencies. This Section strengthens also the
subpoena authority.
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Subtitle J
Section 991. Securities and Exchange Commission Self-Funding
Section 991provides for the SEC to become a self-funded organization. Each year the SEC will
submit a budget request to Congress and the Treasury. The Treasury will deposit this money into an
account for use by the SEC. The SEC will set its fees and assessments at a level meant to fully repay
Treasury. If the SEC does not recoup sufficient funds, then the SEC is not obligated to fully repay
Treasury. Any collections in excess of 25% of the next year‘s budget request must be paid to Treasury.
The Council of Institutional Investors, 261 former SEC Chief Accountant Mr. Lynn Turner, 262 the
Investment Adviser Association, 263 and the Investor‘s Working Group 264 support this policy.
Title X – Bureau of Consumer Financial Protection
Section 1001. Short title.
Section 1001 establishes the name of this title to be the Consumer Financial Protection Act of
2010.
Section 1002. Definitions.
Section 1002 provides the definitions for key terms in Title X.
Paragraph 1 defines the term ―affiliate.‖
Paragraph 2 explains that ―Bureau‖ means the Bureau of Consumer Financial Protection.
Paragraph 3 defines the term ―business of insurance.‖
Paragraph 4 defines the term ―consumer.‖
Paragraph 5 makes clear that financial products or services defined in the Act that are offered or
provided for use by consumers primarily for personal, family, or household purposes are considered to be
"consumer financial products or services" for purposes of this Act. In addition, other key financial
activities that are central to consumers are also included in this definition. These include, among others
listed, the servicing of mortgage loans and debt collection services where the financial service being
provided is the result of a contract between the lender and the servicer or debt collector. For example,
mortgage servicers typically provide services to the owners of the mortgages. Nonetheless, this service is
included in the definition of "consumer financial product or service" because of its obvious impact on
consumers. A number of other financial activities of a similar nature are included in this definition.
Paragraph 6 defines "covered person," as any person engaged in offering or providing a consumer
financial product or service and an affiliate of such a person that provides a material service in connection
261 Mr. Jeff Mahoney, Council of Institutional Investors, letter to Senator Dodd, p.3, November 18, 2009.
262 Enhancing Investor Protection and the Regulation of Securities Markets – Part I: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. Lynn Turner).
263 Enhancing Investor Protection and the Regulation of Securities Markets – Part II: Testimony before the U.S. Senate Committee on Banking, Housing, and
Urban Affairs, 111 th Congress, 1 st session (2009)(Testimony of Mr. David Tittsworth).
264 U.S. Financial Regulatory Reform: An Investor‘s Perspective, Investor‘s Working Group, July 2009.
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with the provision of such consumer financial product or service is subject to the regulatory authority of
and, in some cases, to examinations by, the CFPB under this title.
Paragraph 7 defines the term ―credit.‖
Paragraph 8 defines ―deposit-taking activity.‖
Paragraph 9 defines the term ―designated transfer date.‖
Paragraph 10 defines the term ―Director.‖
Paragraph 11 defines the term ―enumerated consumer laws.‖
Paragraph 12 defines the term ―Federal consumer financial law.‖
Paragraph 13 defines the term ―financial product or service‖ and is modeled on the activities that
are permissible for a bank or a bank holding company, such as under section 4(k) of the Bank Holding
Company Act and implementing regulations. However, it is more narrowly drawn in this Act in that the
list does not include insurance or securities activities. The paragraph describes the activities, products,
and services that are defined as a "financial product or service" in the context of this legislation. The
legislation does not intend to capture as "covered persons" companies that engage in financial data
processing activities, as defined in paragraph 13, where the company acts as a mere conduit for such data,
provides services to a person that enables that person to establish and maintain a web site simply as a
conduit, or merchants that provide for electronic payments for the sale of their nonfinancial goods or
services.
Paragraph 14 defines the term ―foreign exchange.‖
Paragraph 15 defines the term ―insured credit union.‖
Paragraph 16 defines the term ―payment instrument.‖
Paragraph 17 defines the term ―person.‖
Paragraph 18 defines the term ―person regulated by the Commodity Futures Trading
Commission.‖
Paragraph 19 defines the term ―person regulated by the Commission.‖
Paragraph 20 defines the term ―person regulated by a State insurance regulator.‖
Paragraph 21 defines the term ―person that performs income tax preparation activities for
consumers.‖
Paragraph 22 defines the term ―prudential regulator.‖
Paragraph 23 defines the term ―related person.‖
Paragraph 24 defines the term "service provider" and is designed to create authority that is
generally comparable to the authority that federal banking regulators have under the Bank Service
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Company Act. It is included in this Act in order to ensure that material outsourced services by a covered
person in connection with the offering or provision of a consumer financial product or service are subject
to the regulation and supervision of the CFPB for the activities that could be done directly by the covered
person. Without such authority, covered persons could remove many important functions that bear
directly on consumers from the CFPB‘s oversight simply by contracting those functions out to service
providers, thereby escaping the jurisdiction of the CFPB and leading to significant regulatory arbitrage.
Companies that merely provide general support or ministerial services to a broad range of businesses, nor
space for advertising either in print or in an electronic medium, are not intended to be defined as service
providers for the purposes of this Act.
Paragraph 25 defines the term ―State.‖
Paragraph 26 defines the term ―stored value.‖
Paragraph 27 defines the term ―transmitting or exchanging money.‖ This paragraph is not
intended to capture a mere conduit, such as a telecommunications company that provides a network over
which a money service business sends funds. The paragraph is intended to cover the companies that are
receiving currency directly from a consumer, not as a consequence of receiving it from the money service
business for further transmission to a recipient.
Subtitle A –Bureau of Consumer Financial Protection.
Section 1011. Establishment of the Bureau.
This section creates the Bureau of Consumer Financial Protection (the Bureau) in the Federal
Reserve System; it establishes the Bureau‘s authority to regulate the offering and provision of consumer
financial products and services. This section also establishes the positions of the Director and Deputy
Director of the Bureau. The Director is appointed by the President and confirmed by the Senate for a 5-
year term and subject to removal for cause.
Section 1012. Executive and administrative powers.
Section 1012 authorizes the Bureau to establish general policies with respect to all executive and
administrative functions of the Bureau. It provides that the Director may delegate to any authorized
employee, representative, or agent any power vested in the Bureau. The section makes clear that the
Bureau is to operate without any interference by the Board of Governors of the Federal Reserve including
with regards to rule writing, issuance of orders, examinations, enforcement actions, and appointment or
removal of employees of the Bureau. These provisions are modeled on similar statutes governing the
Office of the Comptroller of the Currency and the Office of Thrift Supervision, which are located within
the Department of Treasury.
This section also establishes that, like other federal financial services regulators, any Bureau
testimony, legislative recommendations, or comments on legislation are not subject to review or approval
by other agencies. The Bureau must make clear that any such communications do not reflect the views of
the President or Board of Governors.
Section 1013. Administration.
This section authorizes the Director to appoint and employ officials and professional staff, and to
establish in the Bureau functional units for research, community affairs, and consumer complaints. The
Committee expects these functions to ensure that the Bureau has a robust knowledge of the markets for
consumer financial products and services in order to meet its purposes and objectives in as efficient and
effective manner as possible. The Committee also expects the Bureau to work with other federal
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agencies, such as the Federal Trade Commission, to make use of the FTC‘s existing consumer complaints
collection infrastructure where efficient and advantageous in facilitating complaint monitoring, response,
and referrals. Section 1013 also establishes within the Bureau an Office of Fair Lending and Equal
Opportunity and an Office of Financial Literacy. Evidence of discriminatory pricing in the provision of
auto loans, certain terms of mortgage loans, and other products indicate the importance of tracking this
information. Likewise, a more effective effort to improve financial literacy should play a crucial role in
improving consumer protection.
Section 1014. Consumer Advisory Board.
Section 1014 requires the Director to create a Consumer Advisory Board and to consult with it on
matters pertaining to the Bureau‘s functions and authorities. This panel is modeled on the Consumer
Advisory Council of the Federal Reserve Board and is intended to bring a broad spectrum of perspectives
together to advise the Director. This provision requires the Director to appoint 6 members to the
Consumer Advisory Board who have been recommended by the Federal Reserve Bank Presidents. The
provision requires that members are appointed without regard to party affiliation, just like the members of
the advisory committees to the Federal Reserve, the SEC, the FDIC, the FDA, and many other federal
advisory committees. This is important because, as the GAO found in 2004, when a federal advisory
committee is viewed as politicized, the value of its work can be jeopardized.
Section 1015. Coordination.
This section requires the Bureau to coordinate with the SEC and CFTC and Federal agencies and
State regulators to promote consistent regulatory treatment of consumer financial and investment products
and services.
Section 1016. Appearances before and reports to Congress.
This section requires the Director to appear before Congress at semi-annual hearings and,
concurrently, to prepare and submit a report to the President and Congress concerning the Bureau‘s
budget and regulation, supervision, and enforcement activities. This provision is modeled on the semiannual
monetary report and testimony requirement imposed on the Federal Reserve. The Committee
expects that this requirement will ensure the ongoing accountability of the Bureau to the Committee and
the Congress.
Section 1017. Funding; penalties and fines.
Section 1017 requires the Federal Reserve Board to transfer the amount determined by the
Director to to be reasonably necessary for the Bureau‘s annual budget, not to exceed a specified
percentage of the total operating expenses of the Federal Reserve System as reported in the 2009 Annual
Report of the Board of Governors. The Bureau‘s funding is capped at 12 percent for fiscal year 2013 and
each year thereafter, except that the cap is to be adjusted for inflation, and will be subject to annual audits
and reports to Congress by the Government Accountability Office This funding is needed to perform the
following key functions: examinations and enforcement over larger banks, mortgage market companies,
and other large covered nondepository companies; registration and reporting by nondepository companies
that are subject to the Bureau‘s examination authority; analytical support, monitoring and research,
industry guidance and rulemaking; operation of a nationwide consumer complaint center; and consumer
financial education. The mortgage market consists of more than 25,000 lenders, servicers, brokers, and
loan modification firms that would be subject to Bureau supervision and enforcement. Treasury estimates
that there are more than 75,000 nonbank, non-mortgage firms offering or providing consumer financial
products or services, of which the agency would supervise a percentage. In order to conduct thorough
supervision of these firms comparable to bank consumer compliance supervision will require an adequate
budget.
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The Committee finds that the assurance of adequate funding, independent of the Congressional
appropriations process, is absolutely essential to the independent operations of any financial regulator.
This was a hard-learned lesson from the difficulties faced by the Office of Federal Housing Enterprise
Oversight (OFHEO), which was subject to repeated Congressional pressure because it was forced to go
through the annual appropriations process. It is widely acknowledged that this helped limit OFHEO‘s
effectiveness. For that reason, ensuring that OFHEO‘s successor agency – the Federal Housing Finance
Agency – would not be subject to appropriations was a high priority for the Committee and the Congress
in the Housing and Economic Recovery Act of 2008. The budget established in this Act will ensure that
the Bureau has the funds to perform its mission. By comparison with other financial regulatory bodies,
the CFPB budget is modest, as the chart below illustrates.
This section also establishes within the Federal Reserve Board a special fund for receipts which
can be invested under certain guidelines and which are to be used to pay for Bureau expenses. Finally,
section 1017 creates a victims‘ relief fund for civil penalties obtained by the Bureau.
Section 1018. Effective date.
This section provides that this subtitle shall become effective on the date of enactment of this Act.
Subtitle B – General Powers of the Bureau.
Section 1021. Purpose, objectives, and functions.
This section mandates that the purpose of the Bureau is to implement and enforce, where
applicable, Federal consumer financial laws to ensure that markets for consumer financial products and
services are fair, transparent and competitive.
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The Bureau is authorized to act to ensure that consumers are provided with accurate, timely, and
understandable information in order to make effective decisions about financial transactions; to protect
consumers from unfair, deceptive, or abusive acts and practices and from discrimination; to reduce
unwarranted regulatory burdens; to ensure that Federal consumer financial law is enforced consistently in
order to promote fair competition; and to ensure that markets for consumer financial products and services
operate transparently and efficiently to facilitate access and innovation.
This section further establishes the Bureau‘s functions with regard to regulation, supervision and
enforcement, including: conducting financial education programs; collecting, investigating and
responding to consumer complaints; collecting and publishing information relevant to the functioning of
markets for consumer financial products and services, supervising covered persons for compliance with
Federal consumer financial law, and taking appropriate enforcement action; issuing rules, orders and
guidance; and performing other necessary support activities to facilitate the Bureau‘s functions.
Section 1022. Rulemaking authorities.
This section authorizes the Bureau to administer, enforce and implement the provisions of Federal
consumer financial law and, more specifically authorizes the Bureau to prescribe rules and issue orders
and guidance as may be necessary to carry out the purposes of, and prevent evasions of, those laws.
Under this section, the Bureau must, when prescribing rules, consider potential benefits and costs to
consumers and covered persons, and to consult with prudential regulators regarding consistency with
safety and soundness considerations and other objectives of such agencies. This consultation would have
to take place prior to the Bureau proposing a rule as well as during the public comment process. If during
such consultation process a prudential regulator provides the Bureau with a written objection to the
proposed rule, the Bureau is required to include in the adopting release a description of the objection and
the basis for the Bureau decision regarding such objection. The Bureau is authorized under this section to
exempt classes of covered persons, service providers, or consumer financial products or services, from
provisions of this title.
This section requires the Bureau to monitor for risks to consumers in the offering or provision of
consumer financial products or services. In monitoring for risks, the Bureau is authorized to consider
factors including likely risks and costs to consumers associated with buying or using a type of consumer
financial product or service, the extent to which the law is likely to adequately protect consumers, and the
extent to which the risks of a consumer financial product or service may disproportionately affect
traditionally underserved consumers. The Bureau is further granted authority to gather and compile
information regarding the organization, business conduct, markets, and activities of persons operating in
consumer financial services markets, and to make such information public, as is in the public interest.
The Committee considers the monitoring and information gathering function to be an essential
part of the Bureau‘s work. The Bureau must stay closely tuned to the marketplace for consumer financial
products and services in order to effectively fulfill the purposes and objectives of this title.
Under this section, the Bureau is provided with access to the examination and financial condition
reports made by a prudential regulator or other Federal agency having jurisdiction over a covered person.
Similarly, a prudential regulator, State regulator or other Federal agency having jurisdiction over a
covered person is provided with access to any examination reports made by the Bureau. The Bureau is
required to take steps to ensure that proprietary, personal or confidential information is protected from
public disclosure. In addition, the Bureau is required to assess the efficacy of its rules.
Section 1023. Review of bureau regulations.
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This section provides for a process by which theFinancial Stability Oversight Council could set
aside a final regulation promulgated by the Bureau if, in the view of two-thirds of the Council, the
regulation would put the safety and soundness of the banking system or the stability of the financial
system at risk. Under this section, an agency represented by a member of the Council may petition the
Council to stay the effectiveness of, or set aside a regulation if the member agency filing the petition has
attempted to work with the Bureau to resolve concerns regarding the effect of the rule on financial
stability or safety and soundness of the banking system. Such petition is required to be filed with the
Council not later than 10 days after the regulation has been published in the Federal Register. A decision
by the Council to set aside a regulation prescribed by the Bureau shall render such regulation
unenforceable.
Any such decision by the Council would be required to be done within certain specified time
limits. A decision to issue a stay of, or set aside, a regulation is required to be published in the Federal
Register as soon as practicable after the decision is made, with an explanation of the reasons for the
decision. A decision by the Council to set aside a regulation prescribed by the Bureau is subject to
judicial review.
This provision is designed to ensure that consumer protection regulations do not put the safety and
soundness of the banking system or the stability of the financial system at risk. This provision is in
addition to the significant consultation requirements included in Section 1022.
The Committee notes that there was no evidence provided during its hearings that consumer
protection regulation would put safety and soundness at risk. To the contrary, there has been significant
evidence and extensive testimony that the opposite was the case. Specifically, it was the failure by the
prudential regulators to give sufficient consideration to consumer protection that helped bring the
financial system down. In fact, it was the organizations that promote consumer protection that were
urging that underwriting standards be tightened for both consumer protection and safety and soundness
reasons, and it was the prudential regulators who ignored these calls.
For example, in testimony before the Committee (June 26, 2007), David Berenbaum from the
National Community Reinvestment Coalition said, ―For the past 5 years, community groups, consumer
protection groups, fair lending groups, and all of our members in the National Community Reinvestment
Coalition have been sounding an alarm about poor underwriting – underwriting that not only endangered
communities, their tax bases, their municipal governments, their ability to have sound services and
celebrate homeownership -- but [underwriting that ] was going to impact on the safety and soundness of
our banking institutions themselves. Those cries for action fell on deaf ears, and here we are today.‖
An article in the American Banker (―Do Safety and Soundness and Consumer Protection Really
Conflict,‖ by Cheyenne Hopkins, March 30, 2010) calls the banking industry argument that such a
conflict exists ―shaky.‖ The article quotes Kevin Jacques who worked for 10 years in the Office of the
Comptroller of the Currency, who said, ―… I cannot recall a meeting I sat in where we worried about
consumer protection and looked at safety and soundness and said the two are in conflict….‖ A former
New York Federal Reserve Bank official, Brad Sabel, agreed with this assessment, saying ―In my
experience I do not recall seeing a case where a consumer protection regulation was found to pose a threat
to safe and sound operations of the banks.‖
Nonetheless, the Committee included this provision in order to reassure that the Bureau cannot put
the safety and soundness or the stability of the financial system at risk.
Section 1024. Supervision of nondepository covered persons.
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Section 1024 establishes the scope of the Bureau‘s supervisory authority over certain
nondepository institutions (nondepository covered persons). Oversight of these companies has largely
been left to the States, and they are not currently subject to regular Federal consumer compliance
examinations comparable to examinations of their depository institution competitors. According to one
Treasury official, ―The federal government spends at least 15 times more on consumer compliance and
enforcement for banks and credit unions than for nonbanks – even though there are at least five times as
many nonbanks as there are banks and credit unions.‖ The Federal Trade Commission has approximately
70 staff members assigned to perform enforcement and monitoring functions for approximately 100,000
nondepository financial service providers nationwide. The FTC‘s authority to issue rules regarding unfair
and deceptive practices is constrained by procedural requirements, and it does not have authority to
conduct compliance exams, as bank regulators do. For that reason, it has brought fewer than 25 lawsuits
in the last five years against mortgage originators, payday lenders and debt collectors.
The authority provided to the Bureau in this section will establish for the first time consistent
Federal oversight of nondepository institutions, based on the Bureau‘s assessment of the risks posed to
consumers and other criteria set forth in this section. Banks and other nondepository companies that
provide consumer financial products or services should be held to the same minimum standards for
complying with Federal consumer financial laws, regardless of their corporate structure.
Specifically, the Bureau will have the authority to supervise all participants in the consumer mortgage
arena, including mortgage originators, brokers, and servicers and consumer mortgage modification and
foreclosure relief services. These entities contributed to the housing crisis that led to the near collapse of
the financial system. The Bureau will also have the authority to supervise larger nondepository
institutions that offer or provide other consumer financial products and services. Larger nondepositories
will be defined through a Bureau rulemaking and in consultation with the Federal Trade Commission.
Nondepository covered persons that are subject to the Bureau‘s supervision authority will be required to
register with the Bureau. This section does not apply to depository institutions.
Specifically, the Bureau will have the authority to supervise all participants in the consumer
mortgage arena, including mortgage originators, brokers, and servicers and consumer mortgage
modification and foreclosure relief services. These entities contributed to the housing crisis that led to the
near collapse of the financial system. The Bureau will also have the authority to supervise larger
nondepository institutions that offer or provide other consumer financial products and services. Larger
nondepositories will be defined through a Bureau rule making and in consultation with the Federal Trade
Commission. Nondepository covered persons that are subject to the Bureau‘s supervision authority will
be required to register with the Bureau. This section does not apply to depository institutions.
The Bureau will have the authority to require reports from and to conduct periodic examinations
of nondepository covered persons described in section 1026(a) to assess compliance with Federal
consumer financial laws, to obtain information about activities and compliance systems, and to detect and
assess risks to consumers and markets for consumer financial products and services. The Bureau will
exercise its authority by establishing a risk-based supervision program based on an assessment of the risks
posed to consumers in certain product and geographic markets. In establishing the risk-based supervisory
program, the Bureau will consider the asset size of the nondepository covered person, the volume of
consumer financial product and service transactions it is engaged in, the risks to consumers of those
products and services, and the extent to which the institution is overseen by State regulators.
Section 1024 provides that the Bureau‘s enforcement authority over larger nondepository covered
persons, other than mortgage entities described in section 1024(a)(1)(A), is exclusive, although other
Federal agencies may recommend (in writing) enforcement actions to the Bureau. Pursuant to a
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Memorandum of Understanding, the Bureau and the Federal Trade Commission will coordinate
enforcement action of nondepository mortgage actors, including civil actions.
Section 1025. Supervision of very large banks, savings associations, and credit unions.
Section 1025 grants the Bureau primary examination and enforcement authority over all insured
depository institutions and credit unions with more than $10 billion in assets. This authority extends to
the affiliates and service providers of these large depositories. The current consumer protection system
divides jurisdiction and authority for consumer protection between many federal regulators, whose
mission is not focused on consumer protection. The result has been that banks could choose the least
restrictive consumer compliance supervisor. The fragmented regulatory structure also resulted in finger
pointing among regulators and inaction when problems with consumer products and services arose. The
authority granted to the Bureau under this section creates one federal regulator with consolidated
consumer protection authority over the largest depository institutions, leaving regulatory arbitrage and
inter-agency finger pointing in the past.
Specifically, the Bureau will have the authority to require reports from and to conduct periodic
examinations of the largest depository institutions to assess compliance with Federal consumer financial
laws, to obtain information about activities and compliance systems, and to detect and assess risks to
consumers and markets for consumer financial products and services. In order to minimize regulatory
burden, the Bureau is required to coordinate examination and enforcement activities with the appropriate
prudential regulator, including coordinating the scheduling of examinations, conducting simultaneous
examinations unless the financial institution requests otherwise, sharing draft reports, requiring reasonable
opportunity (30 days) to comment, and requiring that concerns raised by the prudential regulator be
considered prior to issuing a final report. The Bureau must also pursue arrangements and agreements
with State bank supervisors to coordinate examinations where appropriate.
Section 1025 also provides that any conflicts between regulators may be resolved by a governing
panel. If the proposed supervisory determinations of the Bureau and the prudential regulator conflict, the
examined financial institution may request that the agencies coordinate and present a joint statement of
coordinated supervisory action. The agencies have 30 days to comply. If the agencies do not issue a joint
statement, the financial institution may appeal to a governing panel 30 days after the joint statement is
due. The governing panel would consist of a representative of the Board of Governors, the FDIC, the
NCUA or OCC on a rotating basis (as long as that agency is not involved in the dispute) and a
representative of the Bureau and the prudential regulator. The panel would have 30 days to provide a
final determination to the financial institution.
Section 1026. Other banks, savings associations, and credit unions.
Section 1026 provides that an insured depository institution or credit union with $10 billion in
assets or less will continue to be examined for consumer compliance by its prudential regulator. The
Bureau is authorized to ride along on a sample of examinations conducted by the prudential regulators,
which will assist the Bureau in understanding the operations of smaller banks and credit unions. The
Bureau would not have authority to take enforcement action. Section 1026 provides the Bureau access to
reports by banks and credit unions under the $10 billion threshold to help it better understand the markets
for consumer financial products and services, and to ensure that it is a fair and consistent market-wide rule
writer.
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Section 1027. Limitations on authorities of the Bureau; preservation of authorities.
Section 1027 lays out the limits on the Bureau‘s authority with regard to certain entities and
product types. These limitations make clear that the Bureau does not have authority over commercial
transactions or the sale of nonfinancial goods or services.
Subsection (a) makes clear that the Bureau may not exercise any authority with respect to a
merchant, retailer, seller or broker of nonfinancial good or service. However, the Bureau would have
authority if such a person is significantly engaged in offering or providing any consumer financial product
or service or is otherwise subject to an enumerated consumer law or other law that is transferred to the
Bureau‘s authority. This subsection also allows a merchant to extend credit to a consumer for the
purchase of a nonfinancial good or service without coming under the authority of the Bureau under this
title. This has been described as allowing local merchants to ―extend a tab‖ to a customer. Merchants
may also collect these debts (or hire someone to do so), or sell such debts, if delinquent, without being
subject to the Bureau‘s authority over those activities. This limitation would not extend to merchants
who, for example, extend credit which exceeds the market value of the good or service offered or
provided or who regularly extend credit that is subject to a finance charge and payable by written
agreement in more than 4 installments.
Under this subsection, the Bureau would have no authority to issue rules or take enforcement
action against merchants, retailers, or sellers of nonfinancial goods or services that are not engaged
significantly in offering or providing consumer financial products or services. The Committee intends
this exception to include persons such as dentists that simply allow their customers to pay bills in multiple
installments without coming under the supervision of the Bureau. Such persons typically are not engaged
significantly in offering or providing consumer financial products or services.
Finally, for the purposes of this section (a), the term ―finance charge‖ is expected to be
interpreted consistent with the current rules that implement the Truth in Lending Act, including
appropriate exclusions from that term for charges for unanticipated late payment, delinquency, or default.
Subsection (b) clarifies that real estate brokerage activities are not covered by the Bureau except to
the extent that a real estate broker is engaged in the offering of a consumer financial product or service or
is otherwise c subject to an enumerated consumer law or transferred authority.
Subsection (c) clarifies that retailers of manufactured housing and modular homes are not covered
by the Bureau except to the extent that a retailer is engaged in offering or providing a consumer financial
product or service or is otherwise covered by a Federal consumer financial law.
Subsection (d) clarifies that accountants and tax preparers are not covered by the Bureau for
certain activities.
Subsection (e) clarifies that attorneys are not covered by the Bureau to the extent they are engaged
in the practice of law under the law of the State in which they are licensed. However, this exception to
the Bureau‘s coverage does not extend to an attorney who is engaged in the offering of a consumer
financial product or service or is otherwise subject to an enumerated consumer law or transferred
authority.
Subsection (f) clarifies that persons regulated by a State insurance regulator are not covered by the
Bureau except to the extent that such persons are engaged in the offering of a consumer financial product
or service or are otherwise covered by a Federal consumer financial law.
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Subsection (g) clarifies the authority of the Bureau with regards to employee benefit plans and
certain other arrangements under the Internal Revenue Code of 1986, such as IRAs, certain education
savings accounts, and others. The subsection preserves the authority of other existing agencies that
regulate these programs. The subsection also prohibits the Bureau from exercising any authority with
respect to these plans except in very limited circumstances. Any rulemaking could be done only after a
joint request by the Secretary of Labor and the Secretary of the Treasury.
Subsection (h) clarifies that persons regulated by a State securities commission are not covered by
the Bureau except to the extent that such persons are engaged in the offering of a consumer financial
product or service or are otherwise subject to an enumerated consumer law or transferred authority.
Subsection (i) clarifies that persons regulated by the SEC are not covered by the Bureau.
However, the SEC is required to consult and coordinate with the Bureau with respect to any rule for the
same type of product as, or competes directly with, a consumer financial product or service that is subject
to the Bureau‘s jurisdiction. This is to ensure equivalent regulatory treatment and prevent regulatory
arbitrage.
Subsection (j) clarifies that persons regulated by the CFTC are not covered by the Bureau. As in
subsection (i), coordination and consultation are required for rule making regarding products of the same
type or that compete with each other and fall under the Bureau‘s jurisdiction.
Subsection (k) clarifies that the Bureau has no authority with respect to a person regulated by the
Farm Credit Administration.
Subsection (l) clarifies that activities relating to charitable contributions are not covered by the
Bureau. However, activities not involving charitable contributions that are the offering or provision of
any consumer financial product or service are covered.
Subsection (m) clarifies that the Bureau may not define engaging in the business of insurance as a
financial product or service.
Subsection (n) clarifies that a number of persons that are described above may be a service
provider and subject to certain requests for information.
Subsection (o) clarifies that the nothing in this title shall be construed as conferring authority on
the Bureau to establish a usury limit on an extension of credit or made by a covered person to a consumer
unless explicitly authorized by law.
Subsection (p) preserves the authorities of the Attorney General of the United States.
Subsection (q) preserves the authorities of the Secretary of the Treasury with regards to a person
who performs income tax preparation activities for consumers.
Subsection (r) preserves the authority of the FDIC and NCUA with regards to deposit and share
insurance.
Section 1028. Authority to restrict mandatory pre-dispute arbitration.
The Committee is concerned that consumers have little leverage to bargain over arbitration
procedures when they sign a contract for a consumer financial product or service. The Bureau is therefore
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equired by this section to conduct a study and provide a report to Congress on the use of mandatory predispute
arbitration agreements as they pertain to the offering or provision of consumer financial products
or services. This section grants the Bureau authority to prohibit or impose conditions and limitations on
certain arbitration agreements between a covered person and a consumer consistent with the results of the
study if it is in the public interest. Additionally, the Bureau is prohibited from restricting consumers from
entering into voluntary arbitration agreements after a dispute has arisen.
The bill empowers the Bureau to take a range of steps, which could include a prohibition, or could
instead be to impose conditions or limitations. In addition, the Bureau may choose to focus on predispute
mandatory arbitration provisions in contracts for certain types of consumer financial products or
services, such as mortgage loans. The Bureau has to justify any rule by finding it is in the public interest
and for the protection of consumers.
Section 1029. Effective date.
This section provides that this subtitle become effective on the designated transfer date.
Subtitle C – Specific Bureau Authorities
Section 1031. Prohibiting unfair, deceptive, or abusive acts or practices.
This section authorizes the Bureau to prevent a covered person from engaging in or committing an
unfair, deceptive or abusive act or practice in connection with a transaction with a consumer for a
consumer financial product or service, or the offering thereof. The Bureau is authorized to prescribe rules
to indentify such acts or practices. In prescribing rules, the Bureau is required to consult with the Federal
banking agencies, or other Federal agencies, as appropriate, concerning the consistency of the proposed
rule with prudential, market, or systemic objectives administered by such agencies.
Current law prohibits unfair or deceptive acts or practices. The addition of ―abusive‖ will ensure
that the Bureau is empowered to cover practices where providers unreasonably take advantage of
consumers. The Bureau could define acts or practices as abusive only if it has a factual basis to show that
the act or practice either: materially interferes with the ability of a consumer to understand a term or
condition of a consumer financial product or service; or takes unreasonable advantage of consumers‘ lack
of understanding of material risks, costs, or conditions of the product; inability to protect their interests in
selecting or using the product; or reasonable reliance on a covered person to act in the consumers‘
interest.
Section 1032. Disclosures.
This section helps ensure that consumers receive effective disclosures relevant to the purchase of
consumer financial products or services. Under this section, the Bureau is granted rulemaking authority
to ensure that information relevant to the purchase of such products or services is disclosed to the
consumer in plain language in a manner that permits consumers to understand the costs, benefits, and
risks associated with the product or service. In prescribing rules, the Bureau is required to consider
available evidence about consumer awareness, understanding of, and responses to disclosures or
communications about the risks, costs, and benefits of consumer financial products or services. The
Bureau is granted the authority to provide a model form of such disclosure standards, and a safe harbor is
provided for covered persons that use model forms included with a rule issued under this section.
Under this section, a procedure is established to allow the Bureau to permit a covered person to
conduct a trial disclosure program for the purpose of improving on any model disclosure forms issued to
consumers to implement an enumerated consumer law. The Bureau is required to propose for public
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comment rules and model forms that combine Truth in Lending Act (TILA) and Real Estate Settlement
Procedures Act (RESPA) disclosures.
Section 1033. Consumer rights to access information.
This section ensures that consumers are provided with access to their own financial information.
This section requires the Bureau to prescribe rules requiring a covered person to make available to
consumers information concerning their purchase and possession of a consumer financial product or
service, including costs, charges, and usage data. The information is required to be made available upon a
consumer‘s request in an electronic form usable by the consumer.
Under this section, a covered person may not be required to make available any confidential or
proprietary information, any information collected by the covered person for antifraud or anti-money
laundering purposes, or any information that the covered person cannot retrieve in the ordinary course of
business. This section does not impose a duty on covered persons to maintain or keep any information
about a consumer.
Section 1034. Response to consumer complaints and inquiries.
Section 1034 requires the Bureau to establish procedures, in consultation with the appropriate
Federal regulatory agencies, for providing a timely response to consumer complaints or inquiries which
include steps taken by the regulator in response to the complaint or inquiry, any responses received by the
regulator from the institution, and any follow-up plans or actions by the regulator in response to the
consumer complaint or inquiry.
In addition, this section requires very large banks and credit unions (as defined in section 1025)
subject to supervision and primary enforcement by the Bureau to provide a timely response to the Bureau,
the prudential regulators, and any other related agency concerning a consumer complaint or inquiry. This
includes steps taken by the institution in response to the complaint or inquiry, responses received by the
institution from the consumer, and any follow-up plans or actions by the institution in response to the
consumer complaint or inquiry.
Section 1034 also requires these very large depository institutions to comply in a timely manner
with a consumer request for information in the control or possession of the institution concerning the
account of the consumer, not including any confidential commercial information, such as algorithms used
to derive credit scores, information collected for the purpose of preventing fraud or other unlawful or
potentially unlawful conduct, information required to be kept confidential by any other provision of law,
or any nonpublic or confidential information, including confidential supervisory information.
Finally, this section requires the Bureau to enter into a Memorandum of Understanding with the
appropriate Federal regulatory agencies to establish procedures by which very large depository
institutions and relevant agencies shall comply with this section.
Section 1035. Private Education Loan Ombudsman.
Section 1035 requires the Secretary of the Treasury, in consultation with the Director, to designate
a Private Education Loan Ombudsman within the Bureau to provide timely assistance to borrowers of
private education loans, and to disseminate information about the availability and functions of the
Ombudsman to borrowers, potential borrowers, and related institutions, agencies, and participants.
This section requires the Ombudsman to receive, review, and attempt to informally resolve
complaints from borrowers of private student loans. It also ensures coordination with the student loan
ombudsman established under the Higher Education Act of 1965 by requiring a Memorandum of
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Understanding no later than 90 days after the designated transfer date. The Private Education Loan
Ombudsman will also compile and analyze data on borrower complaints regarding private education
loans, and make recommendations to the Director, the Secretary of Treasury, the Secretary of Education,
and relevant Congressional Committees.
Finally, the Ombudsman is required to prepare an annual report describing and evaluating its
activities during the preceding year, and to submit the report on a consistent annual date to the Secretary
of the Treasury, the Secretary of Education, and relevant Congressional Committees.
Section 1036. Prohibited acts.
This section prohibits by law certain activities such as the selling or advertising of consumer
financial products or services which are not in conformity with the sections of this title, the failure or
refusal to provide information to the Bureau as required by law, and knowingly or recklessly providing
substantial assistance to another person in violation of section 1031.
Section 1037. Effective date.
This section provides that this subtitle become effective on the designated transfer date.
Subtitle D – Preservation of State Law
Section 1041. Relation to state law.
Section 1041 confirms that the Consumer Financial Protection Act (CFP Act) will not preempt
State law if the State law provides greater protection for consumers. Federal consumer financial laws
historically have established only minimum standards, and have not precluded the States from enacting
more protective standards , and the this title maintains that status quo.
A strong and independent Bureau with a clear mission to keep consumer protections up-to-date
with the changing marketplace will reduce the incentive for State action and increase uniformity. The
Gramm-Leach-Bliley Act of 1999 set federal financial privacy standards and gave the States the authority
to go further. Only three States have used that power, and banks‘ operations have not been impaired. If
States can continue to provide new consumer protections as problems arise, and the Bureau has the
authority to follow the market and keep Federal protection up-to-date, then the Bureau will be in a
position to set a strong, consistent standard that will satisfy the States.
Additionally, State initiatives can be an important signal to Congress and Federal regulators of
the need for Federal action. States are much closer to abuses and are able to move more quickly when
necessary to address them. If States were not allowed to take the initiative to enact laws providing greater
protection for consumers, the Federal Government would lose an important source of information and
reason to adjust standards over time.
For that reason, section 1041 also requires the Bureau to propose a rule making when a majority of
the States has enacted a resolution requesting a new or modified consumer protection regulation by the
Bureau. As part of the rule making, the Bureau is required to consult with federal banking agencies to
determine whether the proposed regulation presents an unacceptable safety and soundness risk. The
Bureau must also make public in the Federal Register its determination to act or not to act on the States‘
request.
Section 1042. Preservation of enforcement powers of states.
Section 1042 grants authority to State attorneys general to enforce this Act against Federal and
State charted entities. State regulators are also authorized to take appropriate action against State
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chartered entities. The section also clarifies that CFP Act does not limit any provision of any enumerated
consumer law that relates to State authority to enforce Federal law. State attorneys general and regulators
are directed to consult or notify the Bureau and the prudential regulators, when practicable, before
initiating an enforcement action pursuant to this section. This section also confirms that the CFP Act has
no impact on the authority of State securities or State insurance regulators regarding their enforcement
actions or rulemaking activities.
Section 1043. Preservation of existing contracts.
Section 1043 makes clear that the CFP Act shall not be construed to affect the applicability of any
rule, order, guidance or interpretation by the OCC or OTS regarding the preemption of State law by a
Federal banking law to any contract entered into by banks, thrifts, or affiliates and subsidiaries thereof,
prior to the date of enactment of the CFP Act. This section is intended to provide stability to existing
contracts.
Section 1044. State law preemption standards for national banks and subsidiaries clarified.
Section 1044 amends the National Bank Act to clarify the preemption standard relating to State
consumer financial laws as applied to national banks. This section does not alter the preemption
standards for State laws of general applicability to business conduct. State consumer financial laws are
defined as laws that directly and specifically regulate the manner, content, or terms and conditions of
financial transactions or accounts with respect to consumers. The standard for preempting State consumer
financial law would return to what it had been for decades, those recognized by the Supreme Court in
Barnett Bank v. Nelson, 517 U.S. 25 (1996 Barnett), undoing broader standards adopted by rules, orders,
and interpretations issued by the OCC in 2004.
Specifically, this section sets out the three circumstances under which a State consumer financial
law can be preempted: (1) when the State law would have a discriminatory effect on national banks or
federal thrifts in comparison with the effect of the law on a bank or thrift chartered in that State; (2) if the
State law, as described in the standard established by the Supreme Court in Barnett, ―prevents or
significantly interferes with a national bank‘s exercise of its power;‖ or (3) the State law is preempted by
another Federal law. A preemption determination pursuant to Barnett can be made by either a court or by
the OCC on a case-by-case basis. The term ―case-by-case basis‖ is defined to permit the OCC to make a
single determination concerning multiple States‘ consumer financial laws, so long as the law contain
substantively equivalent terms.
Prior to making a determination under the Barnett standard, OCC to follow certain procedures
when making a preemption determination. Prior to making such a determination the OCC must first
consult with, and consider the views of, the Bureau. The determination by the OCC must also be based
on substantial evidence supporting the finding that the provision meets the Barnett standard. After
consulting with the Bureau, the OCC must make a written finding that a federal law provides a relevant
substantive standard that would protect consumers if the State law was to be preempted. The federal
standard does not have to be as strong as the State law that is being preempted.
Section 1044 clarifies that nothing affects the deference that a court may afford to the OCC under
the Chevron doctrine when interpreting Federal laws administered by that agency, except for preemption
determinations. For a preemption determination, a reviewing court must assess the validity of the
agency‘s preemption claim based on certain factors, as the court finds to be persuasive and relevant.
Section 1044 does not alter or affect existing laws regarding the charging of interest by national
banks.
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Finally, the OCC is required to periodically publish a list of its preemption determinations.
Section 1045. Clarification of law applicable to nondepository institutions subsidiaries.
Section 1045 clarifies that State law applies to State-chartered nondepository institution
subsidiaries, affiliates, and agents of national banks, other than entities that are themselves chartered as
national banks. Such entities are generally chartered by the States and therefore should be subject to State
law.
Section 1046. State law preemption standards for federal savings associations and subsidiaries
clarified.
Section 1046 amends the Home Owners‘ Loan Act to clarify that State law preemption standards
for Federal savings associations and their subsidiaries shall be made in accordance with the standard
applicable to national banks.
Section 1047. Visitorial standards for national banks and savings associations.
Section 1047 clarifies that a State attorney general may bring a judicial action against a national
bank or Federal savings association to enforce Federal law, as permitted by such law, or nonpreempted
State law, which is consistent with the provisions of the National Bank Act and Home Owners Loan Act
relating to visitorial powers. The United States Supreme Court affirmed this when it overturned a Federal
preemption of States to enforce valid State laws against national banks in Cuomo v. Clearing House
Association, 557 U.S. (2009)(Cuomo). The Court held that the National Bank Act generally preempts
―vistorial‖ supervisory powers by States over national banks, but that law enforcement powers are
separate and not preempted by the National Bank Act. A State attorney general is required to consult with
the OCC before bringing an action against a national bank or Federal savings association.
Section 1048. Effective date.
Section 1048 provides that this subtitle becomes effective on the designated transfer date.
Subtitle E – Enforcement Powers
Section 1051. Definitions.
Section 1051 defines certain key terms for the purposes of this subtitle.
Section 1052. Investigations and administrative discovery.
Section 1052 provides the authority to the Bureau to issue subpoenas for documents and
testimony. It also authorizes demands of materials and provides for confidential treatment of demanded
material. Section 1052 provides for petitions to modify or set aside a demand, and for custodial control
and district court jurisdiction.
Section 1053. Hearings and adjudication proceedings.
Section 1053 provides the authority to the Bureau to conduct hearings and adjudication
proceedings with special rules for cease-and-desist proceedings, temporary cease-and-desist proceedings,
and for enforcement of orders in the United States District Court.
Section 1054. Litigation authority.
Section1054 provides the authority to the Bureau to commence civil action against a person who
violates a provision of this title or any enumerated consumer law, rule or order.
Section 1055. Relief available.
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Section 1055 provides for relief for consumers through administrative proceedings and court
actions for violations of this title, including civil money penalties.
Section 1056. Referrals for criminal proceedings.
Section 1056 authorizes the Bureau to transmit evidence of conduct that may constitute a violation
of Federal criminal law to the Attorney General of the United States.
Section 1057. Employee protection.
Section 1057 provides protection against firings of or discrimination against employees who
provide information or testimony to the Bureau regarding violations of this title.
Section 1058. Effective date.
Section 1058 provides that this subtitle becomes effective on the designated transfer date.
Subtitle F – Transfer of Functions and Personnel and Transitional Provisions
Section 1061. Transfer of consumer financial protection functions.
Section 1061 transfers functions relating to consumer financial protection from the Federal
banking agencies (Federal Reserve, OCC, OTS and FDIC) and NCUA, the Department of Housing and
Urban Development and the Federal Trade Commission to the Bureau.
Section 1062. Designated transfer date.
Section 1062 identifies the date of transfer of functions to the Bureau as between 6 and 18 months
after the date of enactment of the CFP Act and subject to a six month extension. It also requires that the
transfer of functions be completed not later than 2 years after the date of enactment of the CFP Act.
Section 1063. Savings provision.
Section 1063 clarifies that existing rights, duties, obligations, orders, and rules of the Federal
banking agencies, the NCUA, the Department of Housing and Urban Development and the Federal Trade
Commission are not affected by the transfer.
Section 1064. Transfer of certain personnel.
Section 1064 provides for the transfer of personnel from various agencies to the Bureau and
establishes employment and pay protection for two years. It also provides for continuation of benefits.
Section 1065. Incidental transfers.
Section 1065 authorizes the Director of the Office of Management and Budget, in consultation
with the Secretary of the Treasury, to make additional incidental transfers of assets and liabilities of the
various agencies. The authority in this section terminates after 5 years.
Section 1066. Interim authority of the Secretary.
Section 1066 provides the Secretary of the Treasury authority to perform the functions of the
Bureau under the CFP Act until the Director of the Bureau is confirmed by the Senate.
Section 1067. Transition oversight.
Section 1067 ensures an orderly and organized creation of the Bureau. It also requires the Bureau
to submit an annual report to Congress, which shall include plans for the recruitment of a qualified
workforce and a training and development program.
Subtitle G. Regulatory Improvements
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Section 1071. Collection of deposit account data.
Section 1071 authorizes the collection of deposit account data in order to promote awareness and
understanding of the access of individuals and communities to financial services, and to identify business
development needs and opportunities. In developing the rules prescribed under Section 1071, the Bureau
should coordinate with the Federal banking regulators and the National Credit Union Administration
regarding the type and form of the deposit account data, as well as the method of collection, making every
effort to avoid duplicative data collection requirements and minimize additional regulatory burden.
Where substantially similar data is collected by the appropriate Federal banking regulator or the National
Credit Union Administration, the Bureau should use this data. This section becomes effective on the
designated transfer date.
Section 1072. Small business data collection.
Section 1072 authorizes the Bureau to collect data on small businesses to facilitate enforcement of
fair lending laws and to enable communities, governmental entities and creditors to identify business and
community development needs and opportunities of women-owned and minority-owned small
businesses. This section becomes effective on the designated transfer date.
Section 1073. GAO Study on the effectiveness and impact of various appraisal methods.
Section 1073 requires the GAO to conduct a study on various appraisal methods and the extent to
which the usage of such methods impact costs to consumers, conflicts of interest and home price
speculation.
Section 1074. Prohibition on certain prepayment penalties.
Section 1074 prohibits prepayment penalties on all residential mortgage loans that are not a
qualified mortgage and restricts them on qualified mortgages. Qualified mortgages are defined to include
residential mortgages that meet certain criteria, in particular with respect to the application of prepayment
penalties.
Section 1075. Assistance for economically vulnerable individuals and families.
Section 1075 amends the Financial Education and Counseling Grant Program established in the
Housing and Economic Recovery Act of 2008 by expanding the target audience beyond ―potential
homebuyers‖ to ―economically vulnerable individuals and families‖ and deletes the 5 organization limit.
Section 1076. Remittance transfers.
Section 1076 amends the Electronic Fund Transfer Act to establish minimum protections for
remittances sent by consumers in the United States to other countries (remittance transfers). Immigrants
send substantial portions of their earnings to family members abroad. These senders of remittance
transfers are not currently provided with adequate protections under federal or state law. They face
significant problems with their remittance transfers, including being overcharged or not having the funds
reach intended recipients. This section will require disclosures about the costs of sending remittance
transfers to be displayed in storefronts and to be provided to senders prior to and after a transaction. An
error resolution process for remittance transfers is also established.
Specifically, this section will allow consumers to compare costs by requiring remittance providers
to post, on a daily basis, a model transfer for the amounts of $100 and $200 in their storefronts showing
the amount of currency, including fees, which would be received by the recipient of a remittance. It also
will require consumers sending remittances to be provided with simple disclosures describing the amount
of currency for the designated recipient and a promised date of delivery. In addition, it establishes an
error resolution process for remittances that are not properly transmitted.
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Subtitle H – Conforming Amendments
Section 1081. Amendments to the Inspector General Act.
Section 1081 makes conforming amendments to the Inspector General Act to provide the Bureau
with oversight by the Inspector General of the Board of Governors. This section becomes effective on the
date of enactment of this Act.
Section 1082. Amendments to the Privacy Act of 1974.
Section 1082 makes conforming amendments to the Privacy Act. This section becomes effective
on the date of enactment of this Act.
Section 1083. Amendments to the Alternative Mortgage Transaction Parity Act of 1982.
Section 1083 makes conforming amendments to the Alternative Mortgage Transaction Parity Act.
The Alternative Mortgage Parity Act was passed in 1982 to preempt State laws and constitutions that
prohibited adjustable rate mortgage (ARM) loans for Federally-chartered and State chartered entities. It
also preempted State laws with respect to all "alternative" mortgages, including negative amortization
loans and interest only loans. States were unable to regulate terms for mortgages which have proved to
have significant difficulty. The amendment continues to preempt State laws that would prohibit
adjustable rate mortgages, but removes this preemption of other types of "alternative" mortgages or
features, permitting States to legislate in this area.
Section 1084. Amendments to the Electronic Fund Transfer Act.
Section 1084 makes conforming amendments to the Electronic Fund Transfer Act.
Section 1085. Amendments to the Equal Credit Opportunity Act.
Section 1085 makes conforming amendments to the Equal Credit Opportunity Act.
Section 1086. Amendments to the Expedited Funds Availability Act.
Section 1086 makes conforming amendments to the Expedited Funds Availability Act. It also
increases the next-day funds availability amount under the Expedited Funds Availability Act from $100 to
$200, and allows future adjustments for inflation.
Section 1087. Amendments to the Fair Credit Billing Act.
Section 1087 makes conforming amendments to the Fair Credit Billing Act.
Section 1088. Amendments to the Fair Credit Reporting Act and the Fair and Accurate Credit
Transactions Act.
Section 1088 makes conforming amendments to the Fair Credit Reporting Act and the Fair and
Accurate Credit Transaction Act.
Section 1089. Amendments to the Fair Debt Collection Practices Act.
Section 1089 makes conforming amendments to the Fair Debt Collection Practices Act.
Section 1090. Amendments to the Federal Deposit Insurance Act.
Section 1090 makes conforming amendments to the Federal Deposit Insurance Act.
Section 1091. Amendments to the Gramm-Leach-Bliley Act.
Section 1091 makes conforming amendments to the Gramm-Leach-Bliley Act.
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Section 1092. Amendments to the Home Mortgage Disclosure Act.
Section 1092 makes conforming and other amendments to the Home Mortgage Disclosure Act.
The amendments require new data fields to be reported to the Bureau, including borrower age, total points
and fees information, loan pricing, prepayment penalty information, house value for loan to value ratios,
period of introductory interest rate, interest-only or negative amortization information, terms of the loan,
channel of origination, unique originator ID from the Secure and Fair Enforcement for Mortgage
Licensing Act, universal loan identifier, parcel number to permit geocoding, and credit score.
Section 1093. Amendments to the Home Owners Protection Act of 1998.
Section 1093 makes conforming amendments to the Home Owners Protection Act.
Section 1094. Amendments to the Home Ownership and Equity Protection Act of 1994.
Section 1094 makes conforming amendments to the Home Ownership and Equity Protection Act.
Section 1095. Amendments to the Omnibus Appropriations Act, 2009.
Section 1095 makes conforming amendments to the Omnibus Appropriations Act, 2009.
Section 1096. Amendments to the Real Estate Settlement Procedures Act.
Section 1096 makes conforming amendments to the Real Estate Settlement Procedures Act.
Section 1097. Amendments to the Right to Financial Privacy Act of 1978.
Section 1097 makes conforming amendments to the Right to Financial Privacy Act.
Section 1098. Amendments to the Secure and Fair Enforcement for Mortgage Licensing Act of
2008.
Section 1098 makes conforming amendments to the Secure and Fair Enforcement for Mortgage
Licensing Act of 2008.
Section 1099. Amendments to the Truth in Lending Act.
Section 1099 makes conforming amendments to the Truth in Lending Act.
Section 1100. Amendments to the Truth in Savings Act.
Section 1100 makes conforming amendments to the Truth in Savings Act.
Section 1101. Amendments to the Telemarketing and Consumer Fraud and Abuse. Prevention Act
Section 1101 makes conforming amendments to the Telemarketing and Consumer Fraud and
Abuse Prevention Act.
Section 1102. Amendments to the Paperwork Reduction Act
Section 1102 makes conforming amendments to the Paperwork Reduction Act.
Section 1103. Adjustment for inflation in the Truth in Lending Act.
Section 1103 amends the Truth in Lending Act to cover transactions of up to $50,000 and allows
future adjustments for inflation.
Section 1104. Effective Date.
Section 1104 provides that Sections 1083 through 1102 become effective on the designated
transfer date.
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Title XI – Federal Reserve System Provisions
Section 1151. Federal Reserve Act Amendment on Emergency Lending Authority
This section amends Section 13(3) of the Federal Reserve Act which governs emergency lending.
Emergency lending to an individual entity is no longer permitted. The Board of Governors now is
authorized to lend to a participant in any program or facility with broad-based eligibility. Policies and
procedures governing emergency lending must be established by regulation, in consultation with the
Secretary of the Treasury. The Treasury Secretary must approve the establishment of any lending
program. Lending programs must be designed to provide liquidity and not to aid a failing financial
company. Collateral or other security for loans must be sufficient to protect taxpayers from losses.
The Board of Governors must report to the Senate Committee on Banking, Housing and Urban
Affairs and the House Committee on Financial Services on any 13(3) lending program within 7 days after
it is initiated, and periodically thereafter. The identities of recipients of emergency lending will be
disclosed within 1 year of receipt of assistance, unless the Federal Reserve reports to Congress that
disclosure would reduce the effectiveness of the program or facility or have other serious adverse effects,
in which case the identities of recipients will be disclosed no later than 1 year after the program
terminates. The GAO will report to Congress evaluating whether a determination not to disclose recipient
identities within a year is reasonable.
Section 1152. Reviews of Special Federal Reserve Credit Facilities
This section amends Section 714 of Title 31, United States Code, to establish Comptroller General
audits of emergency lending by the Board of Governors of the Federal Reserve under Section 13(3) of the
Federal Reserve Act.
Section 1153. Public Access to Information
This section amends Section 2B of the Federal Reserve Act. The Comptroller General audits of
13(3) lending established under Section 1152 of this Act, the annual financial statements prepared by an
independent auditor for the Board of Governors, and reports to the Senate Committee on Banking,
Housing and Urban Affairs on 13(3) lending established under Section 1151 of this Act will be displayed
on a webpage that will be accessed by an ―Audit‖ link on the Board of Governors website. The required
information will be made available within 6 months of the date of release.
Sections 1154-1155. Emergency Financial Stabilization Debt Guarantees
The FDIC will be able to guarantee the debt of solvent insured depositories and their holding
companies under very strict conditions. The Board of Governors of the Federal Reserve and the Financial
Stability Oversight Council must determine that there is a ―liquidity event‖ that failure to take action
would have serious adverse effects on financial stability or economic conditions, and that guarantees are
needed to avoid or mitigate the adverse effects. The determination must be in writing and is subject to
GAO audit. The FDIC may then set up a facility to guarantee debt, following policies and procedures
determined by regulation, but the terms and conditions of the guarantees must be approved by the
Secretary of the Treasury.
The Secretary will determine a maximum amount of guarantees, and the President may request
Congress to allow that amount. If the President does not submit the request, the guarantees will not be
made. Congress has 5 days to disapprove the request. Fees for the guarantees are set to cover all
expected costs. If there are losses, they are recouped from those firms that received guarantees.
Section 1156. Additional Related Amendments
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The FDIC may not exercise its systemic risk authority to establish any widely available debt
guarantee program for which Section 1155 would provide authority.
If any firm defaults on a debt guarantee provided under section 1155, the FDIC shall appoint itself
receiver of the company if it is an insured depository. If the defaulting firm is not an insured depository,
the FDIC shall pursue one of two alternatives. Under the first alternative the FDIC will require
consideration that the company be put into the resolution mechanism pursuant to Section 203, and require
that the company file for bankruptcy if the FDIC is not appointed receiver within 30 days. Under the
second alternative the FDIC will file a petition for involuntary bankruptcy on behalf of the defaulting
company.
Section 1157. Changes to Federal Reserve Governance
The Federal Reserve Act is amended to state that a member of the Board of Governors of the
Federal Reserve shall serve as Vice Chairman for Supervision. The Vice Chairman, who will be
designated by the President, by and with the advice and consent of the Senate, will develop policy
recommendations regarding supervision and regulation for the Board, and will appear before Congress
semi-annually to report on the efforts, objectives and plans of the Board with respect to the conduct of
supervision and regulation.
The Federal Reserve Act is amended to give the Board of Governors of the Federal Reserve a
formal responsibility to identify, measure, monitor, and mitigate risks to U.S. financial stability.
The Federal Reserve Act is amended to state explicitly that the Board of Governors of the Federal
Reserve may not delegate to a Federal reserve bank its functions for establishing supervisory and
regulatory policy for bank holding companies and other financial firms supervised by the Board.
To eliminate potential conflicts of interest at Federal reserve banks, the Federal Reserve Act is
amended to state that no company, or subsidiary or affiliate of a company that is supervised by the Board
of Governors can vote for Federal reserve bank directors; and the officers, directors and employees of
such companies and their affiliates cannot serve as directors.
The Federal Reserve Act is amended to state that the Federal Reserve Bank of New York
president, who is currently appointed by the district board of directors, will be appointed by the President,
by and with the advice and consent of the Senate.
Title XII – Improving Access to Mainstream Financial Institutions
Section 1201. Short title.
This section establishes the name of the title to be the ―Improving Access to Mainstream Financial
Institutions Act.‖
Section 1202. Purpose.
This section establishes the purpose of this title to encourage initiatives for financial products and
services that are appropriate and accessible for millions of Americans who are not fully incorporated into
the financial mainstream. The Committee is concerned about lack of access to mainstream financial
institutions for significant numbers of unbanked or underbanked individuals. About one in four families
are unbanked or underbanked. Many are low- and moderate-income families that cannot afford to have
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their earnings diminished by reliance on high-cost and often predatory financial products and services.
Underbanked consumers rely on non-traditional forms of credit including payday lenders, title lenders, or
refund anticipation loans for financial needs. The unbanked are unable to save securely for education
expenses, a down payment on a first home, or other future financial needs.
Section 1203. Definitions.
Section 1204. Expanded access to mainstream financial institutions.
Section 1204 authorizes programs intended to assist low- and moderate-income individuals
establish bank or credit union accounts. This section authorizes the Treasury Secretary to establish a
multiyear program of grants, cooperative agreements, financial agency agreements, and similar contracts
or undertakings to promote initiatives designed to expand access to mainstream financial institutions by
low and moderate income individuals. Entities eligible under this program include: 501(c)(3)
organizations; federally insured depository institutions; community development financial institutions;
State, local, or tribal government entities; and partnerships or other joint ventures comprised of one or
more of these such entities. An eligible entity may, in participating in a program established by the
Secretary under this section, offer or provide to low and moderate income individuals products or services
including small-dollar value loans and financial education and counseling.
Section 1205. Low-cost alternatives to payday loans.
Section 1205 will encourage the development of small, affordable loans as an alternative to more
costly, predatory, payday loans. This section authorizes the Secretary to establish multiyear
demonstration programs by means of grants, cooperative agreements, financial agency agreements, and
similar contracts or undertakings with eligible entities to provide low-cost small loans to consumers that
will provide alternatives to payday loans. Loans under this section are required to be made on terms and
conditions and pursuant to lending practices that are reasonable for consumers. The authorization of a
grant program under this section is intended to encourage the further development of affordable small
loans that will assist working families by providing access to reasonable credit and providing financial
education opportunities. Entities awarded a grant under this section are required to promote financial
literacy and education opportunities, such as relevant counseling services, educational courses, or wealth
building programs, to each consumer provided with a loan pursuant to this section.
Section 1206. Grants to establish loan-loss reserve funds.
Section 1206 will enable Community Development Financial Institutions to establish and maintain
small dollar loan programs by establishing a grant program within the CDFI Fund to encourage affordable
small dollar lending through loan-loss reserve funds and provision of technical assistance. This section
directs the CDFI Fund to make grants to CDFIs to establish loan-loss reserve funds to help CDFIs defray
the costs of operating small dollar loan programs in order to help provide consumers access to mainstream
financial institutions and provide payday loan alternatives. Loan-loss reserve funds enable financial
institutions to maintain the necessary capital to offer small dollar loans in a prudentially sound manner. A
CDFI receiving grants under this program must provide matching funds equal to 50% of the amount of
any grant received under this section. Grants received by a CDFI under this section may not be used to
provide direct loans to consumers, and may be used to help recapture a portion or all of a defaulted loan
made under the small dollar loan program.
This section further requires the Fund to provide technical assistance grants to CDFIs to support
and maintain small dollar loan programs. Technical assistance grants help financial institutions defray the
initial fixed costs of establishing a small dollar loan program and effectively implement grant activities.
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This section sets requirements for the terms and conditions of loans made by participating
institutions to ensure affordability and help underserved consumers improve their financial condition.
Small dollar loan programs are defined as loan programs where a CDFI offers loans to consumers that do
not exceed $2500; are required to be paid in installments; have no prepayment penalty; report to at least
one national consumer reporting agency; and meet any other affordability requirement established by the
Administrator of the Fund.
Section 1207. Procedural provisions.
This section requires an eligible entity desiring to participate in a program or obtain a grant under
this title to submit an application to the Secretary.
Section 1208. Authorization of appropriations.
This section authorizes to be appropriated to the Secretary, such sums necessary to administer and
fund the programs and projects authorized by this title. It further authorizes to be appropriated to the
Fund for each fiscal year beginning in FY 2010, an amount equal to the amount of the administrative
costs of the Fund for the operation of the grant program established under this title.
Section 1209. Regulations.
This section authorizes the Secretary to promulgate regulations to implement and administer the
grant programs and undertakings authorized by this title, including limiting the eligibility of entities as
deemed appropriate for certain activities authorized in Section 1204.
Section 1210. Evaluation and reports to Congress.
This section requires the Secretary to submit a report to the Senate Committee on Banking,
Housing and Urban Affairs and the House Financial Services Committee containing a description of the
activities funded, amounts distributed, and measurable results, as appropriate and available.
VI. HEARING RECORD
Since the beginning of the 110 th Congress, the Committee on Banking, Housing, and Urban Affairs has
held 79 hearings on topics surrounding the housing and economic crisis and financial regulatory reform.
Preserving the American Dream: Predatory Lending Practices and Home Foreclosures
Wednesday, February 7, 2007
Witnesses: The Reverend Jesse Jackson, President and Founder, RainbowPUSH Coalition; Mr. Harry
H. Dinham, President, National Association of Mortgage Brokers; Mr. Hilary Shelton, Executive
Director, National Association for the Advancement of Colored People; Mr. Martin Eakes, Chief
Executive Officer, Self-Help Credit Union and the Center for Responsible Lending; Ms. Jean
Constantine-Davis, Senior Attorney, AARP; Mr. Douglas G. Duncan, Senior Vice President of
Research and Business Development, and Chief Economist, Mortgage Bankers Association; Ms. Delores
King, Consumer Ms. Amy Womble, Consumer.
Mortgage Market Turmoil: Causes and Consequences
Thursday, March 22, 2007
Witnesses:
Panel 1: Mr. Emory W. Rushton, Senior Deputy Comptroller and Chief National Bank Examiner, Office
of the Comptroller of the Currency; Mr. Joseph A. Smith, North Carolina Commissioner of Banks and
Chairman, Conference of State Bank Supervisors; Mr. Roger T. Cole, Director, Division of Banking
Supervision and Regulation, Board of Governors of the Federal Reserve System; Mr. Scott M. Polakoff,
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Senior Deputy Director and Chief Operating Officer, Office of Thrift Supervision; Ms. Sandra
Thompson, Director of the Division of Supervision and Consumer Protection, Federal Deposit Insurance
Corporation.
Panel 2: Mr. Brendan McDonagh, Chief Executive Officer, HSBC Finance Corporation; Mr. Sandy
Samuels, Executive Managing Director, Countrywide Financial Corporation; Mr. Laurent Bossard,
Chief Executive Officer, WMC Mortgage; Mr. L. Andrew Pollock, President, First Franklin Financial
Corporation; Ms. Janis Bowdler, Senior Policy Analyst, National Council of La Raza; Mr. Irv
Ackelsberg, Consumer Attorney; Ms. Jennie Haliburton, Consumer; Mr. Al Ynigues, Borrower.
Subprime Mortgage Market Turmoil: Examining the Role of Securitization
Tuesday, April 17, 2007
Witnesses: Mr. Gyan Sinha, Senior Managing Director and Head of ABS and CDO Research, Bear
Sterns & Co. Inc.; Mr. David Sherr, Managing Director and Head of Securitized Products, Lehman
Brothers; Ms. Susan Barnes, Managing Director of Ratings Services, Standard and Poor's; Mr. Warren
Kornfeld, Managing Director, Residential Mortgage-Backed Securities Rating Group, Moody's Investors
Service; Mr. Kurt Eggert, Professor of Law, Chapman University School of Law; Mr. Christopher L.
Peterson, Assistant Professor of Law, Levin College of Law, University of Florida.
Ending Mortgage Abuse: Safeguarding Homebuyers
Tuesday, June 26, 2007
Witnesses: Mr. David Berenbaum, Executive Vice President, National Community Reinvestment
Coalition; Professor Anthony Yezer, Department of Economics, George Washington University; Ms.
Denise Leonard, Chairman and CEO, Constitution Financial Group, Inc. on behalf of the National
Association of Mortgage Brokers; Mr. John Robbins, Chairman, Mortgage Bankers Association; Mr.
Wade Henderson, President and CEO, Leadership Conference on Civil Rights; Mr. Alan Hummel,
Senior Vice President and Chief Appraiser, Forsythe Appraisals, LLC on behalf of the Appraisal Institute;
Mr. Pat V. Combs, President, National Association of REALTORS; Mr. Michael D. Calhoun,
President, Center For Responsible Lending.
The State of the Securities Markets
Tuesday, July 31, 2007
Witnesses: Honorable Christopher Cox, Chairman, Securities and Exchange Commission.
The Role and Impact of Credit Rating Agencies on the Subprime Credit Markets
Wednesday, September 26, 2007
Witnesses
Panel 1: Honorable Christopher Cox, Chairman, Securities and Exchange Commission.
Panel 2: Mr. John Coffee, Adolf A. Berle Professor of Law, Columbia Law School; Dr. Lawrence J.
White, Leonard E. Imperatore Professor of Economics, New York University; Mr. Micheal Kanef,
Group Managing Director, Assett Finance Group, Moody‘s Financial Services; Ms. Vickie A. Tillman,
Executive Vice President for Credit Market Services, Standard & Poor's.
Strengthening our Economy: Foreclosure Prevention and Neighborhood Preservation.
Thursday, January 31, 2008
Witnesses
Panel 1: Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Robert Steel, Under
Secretary of Treasury for Domestic Finance, Department of the Treasury.
Panel 2: Doris Koo, President and CEO, Enterprise Community Partners, Inc; Michael Barr, Senior
Fellow, Center for American Progress, and Professor of Law, University of Michigan Law School; Mr.
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Wade Henderson, President and CEO, Leadership Conference on Civil Rights; Mr. Alex Pollock,
Resident Fellow, American Enterprise Institute.
The State of the United States Economy and Financial Markets.
Thursday, February 14, 2008
Witnesses: Honorable Henry M. Paulson, Secretary of the Treasury; Honorable Christopher Cox,
Chairman, Securities and Exchange Commission; Honorable Ben S. Bernanke, Chairman, Board of
Governors of the Federal Reserve System.
The State of the Banking Industry
Tuesday, March 4, 2008
Witnesses: Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Honorable John
C. Dugan, Comptroller of the Currency, United States Treasury; Honorable John M. Reich, Director,
Office of Thrift Supervision; Honorable JoAnn Johnson, Chairman, National Credit Union
Administration; Honorable Donald Kohn, Vice Chairman, Board of Governors, Federal Reserve
System; Mr. Thomas B. Gronstal, Superintendent of Banking, State of Iowa.
Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators
Thursday, April 3, 2008
Witnesses
Panel 1: The Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve
System; Honorable Christopher Cox, Chairman, Securities and Exchange Commission; Robert Steel,
Under Secretary of Treasury for Domestic Finance, Department of the Treasury; Mr. Timothy F.
Geithner, President, Federal Reserve Bank of New York.
Panel 2: Mr. James Dimon, Chairman and Chief Executive Officer, JP Morgan Chase; Mr. Alan D.
Schwartz, President and Chief Executive Officer, The Bear Sterns Companies, Inc.
Restoring the American Dream: Solutions to Predatory Lending and the Foreclosure Crisis
Monday, April 7, 2008
Witnesses: The Honorable Michael Nutter, Mayor of Philadelphia, Pennsylvania; Ms. Yajaira Rivera,
Philadelphia, Pennsylvania; Ms. Christina Anderson-Jones, Philadelphia, Pennsylvania; Ph.D Ira
Goldstein, Director, Policy and Information Services, The Reinvestment Fund; Mr. Brian A. Hudson,
Sr., Executive Director, Pennsylvania House Finance Agency.
Turmoil in U.S. Credit Markets: Examining Proposals to Mitigate Foreclosures and Restore
Liquidity to the Mortgage Markets.
Thursday, April 10, 2008
Witnesses: Dr. Lawrence H. Summers, Charles W. Eliot University Professor, Harvard University; Dr.
Dean Baker, Co-Director, Center for Economic and Policy Research; Ms. Ellen Harnick, Senior Policy
Counsel, Center for Responsible Lending; Mr. Scott Stern, Chief Executive Officer, Lenders One,
Incorporated; Dr. Douglas Elmendorf, Senior Fellow, The Brookings Institution.
Turmoil in U.S. Credit Markets Impact on the Cost and Availability of Student Loans
Tuesday, April 15, 2008
Witnesses: John (Jack) F. Remondi, Vice Chairman and Chief Financial Officer, Sallie Mae, Inc.; Mr.
Tom Deutsch, Deputy Executive Director, American Securitization Forum; Ms. Patricia McGuire,
President, Trinity Washington University; Ms. Sarah Flanagan, Vice President for Policy Development,
National Association of Independent Colleges and Universities; Mark Kantrowitz, Publisher,
FinAid.org.
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Turmoil in U.S. Credit Markets: Examining Proposals to Mitigate Foreclosures and Restore
Liquidity to the Mortgage Markets
Wednesday, April 16, 2008
Witnesses: Honorable Brian D. Montgomery, Federal Housing Commissioner and Assistant Secretary,
Department of Housing and Urban Development; Mr. Art Murton, Director, Division of Insurance and
Research, Federal Deposit Insurance Corporation; Mr. Scott M. Polakoff, Senior Deputy Director and
Chief Operating Officer, Office of Thrift Supervision;
Turmoil in U.S. Credit Markets: The Role of the Credit Rating Agencies
Tuesday, April 22, 2008
Witnesses
Panel 1: Honorable Christopher Cox, Chairman, Securities and Exchange Commission
Panel 2: Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia University Law
School; Dr. Arturo Cifuentes, Managing Director, R.W. Pressprich & Co.; Mr. Stephen W. Joynt,
President and Chief Executive Officer, Fitch Ratings; Ms. Claire Robinson, Senior Managing Director,
Moody's Investors Service; Ms. Vickie A. Tillman, Executive Vice President for Credit Market Services,
Standard & Poor's.
Turmoil in U.S. Credit Markets: Examining the U.S. Regulatory Framework for Assessing
Sovereign Investments.
Thursday, April 24, 2008
Witnesses
Panel 1: Mr. Scott Alvarez, General Counsel, Board of Governors of the Federal Reserve System; Mr.
Ethiopis Tafara, Director, Office of International Affairs, Securities and Exchange Commission.
Panel 2: Mr. David Marchick, Managing Director, The Carlyle Group; Mr. Paul Rose, Assistant
Professor of Law, Moritz College of Law, Ohio State University; Ms. Jeanne S. Archibald, Partner,
Hogan and Hartson LLP; Mr. Dennis Johnson, Director of Corporate Governance, California Public
Employees' Retirement System.
Turmoil in the U.S. Credit Markets: Examining the Regulation of Investment Banks by the U.S.
Securities and Exchange Commission
Wednesday, May 7, 2008
Witnesses
Panel 1: Mr. Erik Sirri, Director, Division of Market Regulation, Securities and Exchange Commission.
Panel 2 Honorable Arthur Levitt, Former Chairmen, U.S. Securities and Exchange Commission; Mr.
David Ruder, Former Chairmen, U.S. Securities and Exchange Commission.
The State of the Banking Industry: Part II
Thursday, June 5, 2008
Witnesses: Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Honorable John
C. Dugan, Comptroller of the Currency, United States Treasury; Honorable John M. Reich, Director,
Office of Thrift Supervision; Honorable JoAnn Johnson, Chairman, National Credit Union
Administration; Honorable Donald Kohn, Vice Chairman, Board of Governors, Federal Reserve
System; Mr. Timothy J. Karsky, Commissioner/Chairman, North Dakota Department of Financial
Institutions/ Conference of State Bank Supervisors.
Risk Management and its Implications for Systemic Risk
Thursday, June 19, 2008
Witnesses: Honorable Donald Kohn, Vice Chairman, Board of Governors, Federal Reserve System; Dr.
Erik Sirri, Director, Division of Trading and Markets, U. S. Securities and Exchange Commission; Mr.
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Scott M. Polakoff, Deputy Director, Office of Thrift Supervision; Mr. Richard Bookstaber, Financial
Author; Professor Richard Herring, Jacob Safra Professor of International Banking and Co-Director of
the Wharton Financial Institutions Center, Wharton School, University of Pennsylvania; Mr. Kevin
Blakely, President and Chief Executive Officer, Risk Management Association.
Reducing Risks and Improving Oversight in the OTC Credit Derivatives Market
Wednesday, July 9, 2008
Witnesses: Mr. Patrick Parkinson, Deputy Director, Division of Research and Statistics, Board of
Governors of the Federal Reserve System; Mr. James Overdahl, Senior Economist, U.S. Securities and
Exchange Commission; Ms. Kathryn E. Dick, Deputy Comptroller for Credit and Market Risk, Office of
the Comptroller of the Currency; Dr. Darrell Duffie, Dean Witter Distinguished Professor of Finance,
Stanford University, Graduate School of Business; Mr. Craig Donohue, Chief Executive Officer,
Chicago Mercantile Exchange Group; Mr. Edward J. Rosen, Cleary Gottlieb Steen & Hamilton LLP,
Outside Counsel to The Clearing Corporation; Mr. Robert G. Pickel, Executive Director and Chief
Executive Officer, International Swaps and Derivatives Association, Inc.
Recent Developments in U.S. Financial Markets and Regulatory Responses to Them
Tuesday, July 15, 2008
Witnesses: Honorable Henry M. Paulson, Secretary of the Treasury; The Honorable Ben S. Bernanke,
Chairman, Board of Governors of the Federal Reserve System; Honorable Christopher Cox, Chairman,
Securities and Exchange Commission.
State of the Insurance Industry: Examining the Current Regulatory and Oversight Structure
Tuesday, July 29, 2008
Witnesses
Panel 1: Honorable Steven M. Goldman, Commissioner, New Jersey Department of Banking and
Insurance, on behalf of the National Association of Insurance Commissioners; Mr. Travis B. Plunkett,
Legislative Director, Consumer Federation of America; Mr. Alessandro Iuppa, Senior Vice President,
Zurich North America, on behalf of the American Insurance Association; Mr. John L. Pearson,
Chairman, President, and Chief Executive Officer, The Baltimore Life Insurance Company, on behalf of
the American Council of Life Insurers.
Panel 2: Mr. George A. Steadman, President and Chief Operating Officer, Rutherfoord Inc., on behalf of
the Council of Insurance Agents & Brokers; Mr. Thomas Minkler, President, Clark-Mortenson Agency,
Inc., on behalf of the Independent Insurance Agents & Brokers of America; Mr. Franklin Nutter,
President, Reinsurance Association of America; Mr. Richard Bouhan, Executive Director, National
Association of Professional Surplus Lines Offices.
Transparency in Accounting: Proposed Changes to Accounting for Off-Balance Sheet Entities
Thursday, September 18, 2008
Witnesses
Panel 1: Mr. Lawrence Smith, Board Member, Financial Accounting Standards Board (FASB); Mr.
John White, Director, Office of Corporate Finance, Securities and Exchange Commission; Mr. James
Kroeker, Deputy Chief Accountant for Accounting, U.S. Securities and Exchange Commission.
Panel 2: Professor Joseph Mason, Hermann Moyse Jr. Endowed Chair of Banking, E.J. Ourso College
of Business, Louisiana State University; Mr. Donald Young, Managing Director, Young and Company
LLC, and former FASB Board Member; Ms. Elizabeth Mooney, Analyst, Capital Strategy Research, The
Capital Group; Mr. George Miller, Executive Director, American Securitization Forum.
Turmoil in US Credit Markets Recent Actions Regarding Government Sponsored Entities,
Investment Banks and Other Financial Institutions
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Tuesday, September 23, 2008
Witnesses: Honorable Henry M. Paulson, Secretary of the Treasury; The Honorable Ben S. Bernanke,
Chairman, Board of Governors of the Federal Reserve System; Honorable Christopher Cox, Chairman,
Securities and Exchange Commission; Honorable James B. Lockhart, III, Director, Federal Housing
Finance Agency.
Turmoil in the U.S. Credit Markets: The Genesis of the Current Economic Crisis
Thursday, October 16, 2008
Witnesses: Honorable Arthur Levitt, Jr., Senior Advisor, The Carlyle Group; Honorable Eugene A.
Ludwig, Chief Executive Officer, Promontory Financial Group; Honorable Jim Rokakis, Treasurer,
Cuyahoga County, Ohio; Honorable Marc H. Morial, President and CEO, National Urban League; Mr.
Eric Stein, Senior Vice President, Center for Responsible Lending.
Turmoil in the U.S. Credit Markets: Examining Recent Regulatory Responses
Thursday, October 23, 2008
Witnesses: Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Honorable Neel
Kashkari, Interim Assistant Secretary for Financial Stability and Assistant Secretary for International
Affairs, U.S. Department of the Treasury; Honorable James B. Lockhart, III, Director, Federal Housing
Finance Agency; Honorable Elizabeth A. Duke, Governor, Board of Governors of the Federal Reserve
System; Honorable Brian D. Montgomery, Federal Housing Commissioner and Assistant Secretary,
Department of Housing and Urban Development.
Oversight of the Emergency Economic Stabilization Act: Examining Financial Institution Use of
Funding Under the Capital Purchase Program.
Thursday, November 13, 2008
Witnesses: Ms. Anne Finucane, Global Corporate Affairs Executive, Bank of America; Mr. Barry L.
Zubrow, Executive Vice President, Chief Risk Officer, JPMorgan Chase; Mr. Jon Campbell, Executive
Vice President, Chief Executive Officer of the Minnesota Region, Wells Fargo Bank; Mr. Gregory
Palm, Executive Vice President and General Counsel, The Goldman Sachs Group, Inc.; Mr. Martin
Eakes, Chief Executive Officer, Self-Help Credit Union and the Center for Responsible Lending; Nancy
M. Zirkin, Director of Public Policy, Leadership Conference on Civil Rights; Dr. Susan M. Wachter,
Worley Professor of Financial Management, Wharton School of Business, University of Pennsylvania.
Examining the State of the Domestic Automobile Industry
Tuesday, November 18, 2008
Witnesses
Panel 1: Honorable Debbie Stabenow (D-MI), United States Senator.
Panel 2: Mr. Ron Gettelfinger, President, International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America; Mr. Alan Mulally, President and Chief Executive Officer,
Ford Motor Company; Mr. Robert Nardelli, Chairman and Chief Executive Officer, Chrysler LLC; Mr.
G. Richard Wagoner, Jr., Chairman and Chief Executive Officer, General Motors; Dr. Peter Morici,
Professor, Robert H. Smith School of Business, University of Maryland.
The State of the Domestic Automobile Industry: Part II
Thursday, December 4, 2008
Witnesses
Panel 1: Mr. Gene L. Dodaro, Acting Comptroller General, United States Government Accountability
Office.
Panel 2: Mr. Ron Gettelfinger, President, International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America; Mr. Alan Mulally, President and Chief Executive Officer,
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Ford Motor Company; Mr. Robert Nardelli, Chairman and Chief Executive Officer, Chrysler LLC; Mr.
G. Richard Wagoner, Jr., Chairman and Chief Executive Officer, General Motors; Mr. Keith Wandell,
President, Johnson Controls, Inc.; Mr. James Fleming, President, Connecticut Automotive Retailers
Association; Dr. Mark Zandi, Chief Economist and Cofounder, Moody's Economy.com.
Madoff Investment Securities Fraud: Regulatory and Oversight Concerns and the Need for Reform
Tuesday, January 27, 2009
Witnesses: Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia University Law
School; Dr. Henry A. Backe, Jr., Orthopedic Surgeon, Fairfield, Connecticut; Ms. Lori Richards,
Director, Office of Compliance Inspections and Examinations, U.S. Securities and Exchange
Commission; Ms. Linda Thomsen, Director, Division of Enforcement, U.S. Securities and Exchange
Commission; Mr. Stephen Luparello, Interim Chief Executive Officer, Financial Industry Regulatory
Authority; Mr. Stephen Harbeck, Interim Chief Executive Officer, Financial Industry Regulatory
Authority.
Modernizing the U.S. Financial Regulatory System
Wednesday, February 4, 2009
Witnesses
Panel 1: Honorable Paul A. Volcker, Chair of the President's Economic Recovery Advisory Board,
Former Chairman, Board of Governors of the Federal Reserve System.
Panel 2: Mr. Gene L. Dodaro, Acting Comptroller General, United States Government Accountability
Office.
Pulling Back the TARP: Oversight of the Financial Rescue Program
Thursday, February 5, 2009
Witnesses: Mr. Gene L. Dodaro, Acting Comptroller General, United States Government Accountability
Office; Honorable Neil M. Barofsky, Special Inspector General, Troubled Asset Relief Program;
Professor Elizabeth Warren, Chair, Congressional Oversight Panel for the Troubled Asset Relief
Program.
Oversight of the Financial Rescue Program: A New Plan for the TARP
Tuesday, February 10, 2009
Witnesses: Honorable Timothy Geithner, Secretary, United States Department of the Treasury.
Modernizing Consumer Protection in the Financial Regulatory System: Strengthening Credit Card
Protections
Thursday, February 12, 2009
Witnesses: Mr. Travis B. Plunkett, Legislative Director, Consumer Federation of America; Mr. James
C. Sturdevant, Esq., The Sturdevant Law Firm; Mr. Kenneth J. Clayton, Senior Vice President and
General Counsel, Card Policy Council, American Bankers Association; Lawrence M. Ausubel, Professor
of Economics, University of Maryland; Mr. Todd Zywicki, Professor, George Mason University School
of Law; Mr. Adam J. Levitin, Associate Professor of Law, Georgetown University Law Center.
Homeowner Affordability and Stability Plan
Thursday, February 26, 2009
Witnesses: Honorable Shaun Donovan, Secretary, U.S. Department of Housing and Urban
Development.
Consumer Protections in Financial Services: Past Problems, Future Solutions
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Tuesday, March 3, 2009
Witnesses: Mr. Steve Bartlett, President and CEO, Financial Services Roundtable; Honorable Ellen
Seidman, Senior Fellow of New America Foundation, Executive Vice President of ShoreBank
Corporation; Professor Patricia McCoy, George J. & Helen M. England Professor of Law, University of
Connecticut School of Law.
American International Group: Examining what went wrong, government intervention, and
implications for future regulation
Thursday, March 5, 2009
Witnesses: Honorable Donald Kohn, Vice Chairman, Board of Governors, Federal Reserve System; Mr.
Scott M. Polakoff, Senior Deputy Director and Chief Operating Officer, Office of Thrift Supervision;
Mr. Eric Dinallo, Superintendent, New York State Insurance Department.
Enhancing Investor Protection and the Regulation of Securities Markets
Tuesday, March 10, 2009
Witnesses: Mr. John Coffee, Adolf A. Berle Professor of Law, Columbia Law School; Mr. Lynn E.
Turner, Former Chief Accountant, U.S. Securities and Exchange Commission; Mr. Timothy Ryan,
President and CEO, Securities Industry and Financial Markets Association; Mr. Paul Schott Stevens,
President and CEO, Investment Company Institute: Professor Mercer Bullard, Associate Professor and
President, University of Mississippi School of Law and Fund Democracy; Mr. Robert G. Pickel,
Executive Director and Chief Executive Officer, International Swaps and Derivatives Association, Inc.;
Mr. Damon Silvers, Associate General Counsel, AFL-CIO; Thomas G. Doe, CEO, Municipal Market
Advisors.
Perspectives on Modernizing Insurance Regulation
Tuesday, March 17, 2009
Witnesses: Mr. Michael McRaith, Director of Insurance, Illinois Department of Financial and
Professional Regulation, on behalf of the National Association of Insurance Commissioners; Honorable
Frank Keating, President and Chief Executive Officer, The American Council of Life Insurers; Mr.
William R. Berkley, Chairman and Chief Executive Officer, W. R. Berkley Corporation, on behalf of the
American Insurance Association; Mr. Spencer Houldin, President, Ericson Insurance Services, on behalf
of the Independent Insurance Agents and Brokers of America; Mr. John Hill, President and Chief
Operating Officer, Magna Carta Companies, on behalf of the National Association of Mutual Insurance
Companies; Mr. Frank Nutter, President, The Reinsurance Association of America; Mr. Robert
Hunter, Director of Insurance, The Consumer Federation of America.
Lessons Learned in Risk Management Oversight at Federal Financial Regulators
Wednesday, March 18, 2009
Witnesses: Mr. Scott M. Polakoff, Acting Director, Office of Thrift Supervision; Ms. Orice Williams,
Director, Financial Markets and Community Investment, Government Accountability Office; Mr. Roger
Cole, Director, Division of Banking Supervision and Regulation, Federal Reserve Board; Mr. Timothy
Long, Senior Deputy Comptroller, Bank Supervision Policy and Chief National Bank Examiner, Office
of the Comptroller of the Currency; Dr. Erik Sirri, Director, Division of Trading and Markets, U. S.
Securities and Exchange Commission.
Modernizing Bank Supervision and Regulation
Thursday, March 19, 2009
Witnesses: Honorable John C. Dugan, Comptroller of the Currency, Office of the Comptroller of the
Currency; Honorable Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve System;
Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Honorable Michael E.
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Fryzel, Chairman, National Credit Union Administration; Mr. Scott M. Polakoff, Acting Director,
Office of Thrift Supervision; Mr. Joseph A. Smith, North Carolina Commissioner of Banks and
Chairman, Conference of State Bank Supervisors; Mr. George Reynolds, Chairman, National
Association of State Credit Union Supervisors and Senior Deputy Commissioner, Georgia Department of
Banking and Finance.
Current Issues in Deposit Insurance
Thursday, March 19, 2009
Witnesses
Panel 1: Mr. Art Murton, Director, Division of Insurance and Research, Federal Deposit Insurance
Corporation; Mr. David M. Marquis, Executive Director, National Credit Union Administration.
Panel 2: Mr. William Grant, Chairman & CEO, First United Bank and Trust, Oakland, Maryland, on
behalf of the American Bankers Association; Mr. Terry West, President and CEO, VyStar Credit Union
in Jacksonville, Florida, on behalf of the Credit Union National Association; Mr. Steve Verdier, Senior
Vice President, Independent Community Bankers of America; Mr. David J. Wright, CEO, Services
Credit Union, Yankton, South Dakota, on behalf of the National Association of Federal Credit Unions.
Modernizing Bank Supervision and Regulation, Part II
Tuesday, March 24, 2009
Witnesses: Mr. William Attridge, President, Chief Executive Officer and Chief Operating Officer,
Community River Community Bank, on behalf of the Independent Community Bankers of America; Mr.
Daniel A. Mica, President and Chief Executive Officer, Credit Union National Association; Mr. Aubrey
Patterson, Chairman and Chief Executive Officer, BancorpSouth, Inc., on behalf of the American
Bankers Association; Mr. Christopher Whalen, Managing Director, Institutional Risk Analytics; Ms.
Gail Hillebrand, Senior Attorney, Consumers Union of U.S., Inc.
Enhancing Investor Protection and the Regulation of Securities Markets – Part II
Thursday, March 26, 2009
Witnesses
Panel 1: Honorable Mary Schapiro, Chairman, U.S. Securities and Exchange Commission; Honorable
Fred Joseph, President, North American Securities Administrators Association.
Panel 2: Honorable Richard C. Breeden, Former Chairman, U.S. Securities and Exchange Commission;
Honorable Arthur Levitt, Former Chairmen, U.S. Securities and Exchange Commission; Honorable
Paul S. Atkins, Former Commissioner, U.S. Securities and Exchange Commission.
Panel 3: Mr. Richard Ketchum, Chairman and CEO, FINRA; Mr. Ronald A. Stack, Chair, Municipal
Securities Rulemaking Board; Honorable Richard Baker, President and CEO, Managed Funds
Association; Mr. James Chanos, Chairman, Coalition of Private Investment Companies; Ms. Barbara
Roper, Director of Investor Protection, Consumer Federation of America; Mr. David G. Tittsworth,
Executive Director and Executive Vice President, Investment Adviser Association; Ms. Rita Bolger,
Senior Vice President and Associate General Counsel, Standard & Poor‘s, Global Regulatory Affairs;
President Daniel Curry, President, DBRS, Inc.
Lessons from the New Deal
Tuesday, March 31, 2009
Witnesses
Panel 1: Honorable Christina Romer, Chair, Council of Economic Advisors.
Panel 2: Dr. James K. Galbraith, Lloyd M. Bentsen Chair, Lyndon B. Johnson School of Public Affairs,
University of Texas at Austin; Dr. J. Bradford DeLong, Professor of Economics, University of
California Berkeley; Dr. Allan M. Winkler, Professor of History, Miami (Ohio) University; Dr. Lee E.
Ohanian, Professor, University of California, Los Angeles.
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Regulating and Resolving Institutions Considered ‗Too Big to Fail‘
Wednesday, May 6, 2009
Witnesses
Panel 1: Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Mr. Gary Stern,
President, Federal Reserve Bank of Minneapolis.
Panel 2: Honorable Peter Wallison, Arthur F. Burns Fellow in Financial Policy Studies, American
Enterprise Institute; Honorable Martin N. Baily, Senior Fellow, Economic Studies, The Brookings
Institution; Mr. Raghuram G. Rajan, Eric J. Gleacher Distinguished Service Professor of Finance,
University of Chicago Booth School of Business.
Strengthening the S.E.C.‘s Vital Enforcement Responsibilities
Thursday, May 7, 2009
Witnesses: Mr. Richard Hillman, Managing Director, Financial Markets and Community Investment,
U.S. Government Accountability Office; Robert Khuzami, Esq., Director, Division of Enforcement,
U.S. Securities and Exchange Commission; Professor Mercer Bullard, Associate Professor of Law,
University of Mississippi School of Law; Mr. Bruce Hiler, Partner and Head of Securities Enforcement
Group, Cadwalader, Wickersham and Taft LLP.
Manufacturing and the Credit Crisis
Wednesday, May 13, 2009
Witnesses
Panel 1: Mr. Leo Gerard, President, United Steelworkers; Mr. David Marchick, Managing Director,
The Carlyle Group.
Panel 2: Mr. Eugene Haffely, CEO, Assembly and Test Worldwide, Inc.; Lieutenant General Larry
Farrell, (USAF, Retired) President, National Defense Industrial Association; Mr. William Gaskin,
President, Precision Metalforming Association.
Oversight of the Troubled Assets Relief Program
Wednesday, May 20, 2009
Witnesses: Honorable Timothy Geithner, Secretary, United States Department of the Treasury.
The State of the Domestic Automobile Industry: Impact of Federal Assistance
Wednesday, June 10, 2009
Witnesses: Mr. Ron Bloom, Senior Advisor on the Auto Industry, U.S. Department of the Treasury; The
Honorable Edward Montgomery, White House Director of Recovery for Auto Communities and
Workers, The White House.
The Administration‘s Proposal to Modernize the Financial Regulatory System
Thursday, June 18, 2009
Witnesses: Honorable Timothy Geithner, Secretary, United States Department of the Treasury.
Over-the-Counter Derivatives: Modernizing Oversight to Increase Transparency and Reduce Risks
Monday, June 22, 2009
Witnesses
Panel 1: Honorable Mary Schapiro, Chairman, U.S. Securities and Exchange Commission; Honorable
Gary Gensler, Chairman, U.S. Commodity Futures Trading Commission; Ms. A. Patricia White,
Associate Director of the Division of Research and Statistics, Board of Governors of the Federal Reserve
System.
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Panel 2: Dr. Henry Hu, Allan Shivers Chair in the Law of Banking and Finance, University of Texas
School of Law; Mr. Kenneth C. Griffin, Founder, President, and Chief Executive Officer, Citadel
Investment Group, L.L.C.; Mr. Robert G. Pickel, Executive Director and Chief Executive Officer,
International Swaps and Derivatives Association, Inc.; Mr. Christopher Whalen, Managing Director,
Institutional Risk Analytics.
The Effects of the Economic Crisis on Community Banks and Credit Unions in Rural Communities
Wednesday, July 8, 2009
Witnesses: Mr. Jack Hopkins, President and Chief Executive Officer, CorTrust Bank National
Association, Sioux Falls, SD on behalf of the Independent Community Bankers of America; Mr. Frank
Michael, President and CEO, Allied Credit Union, Stockton, CA on behalf of the Credit Union National
Association; Mr. Arthur Johnson, Chairman and CEO, United Bank of Michigan, Grand Rapids, MI on
behalf of the American Bankers Association; Mr. Ed Templeton, President and CEO, SRP Federal
Credit Union, North Augusta, SC; Mr. Peter Skillern, Executive Director, Community Reinvestment
Association of North Carolina.
Creating a Consumer Financial Protection Agency: A Cornerstone of America‘s New Economic
Foundation
Tuesday, July 14, 2009
Witnesses
Panel 1: Honorable Michael S. Barr, Assistant Secretary for Financial Institutions, U.S. Department of
the Treasury.
Panel 2: Honorable Richard Blumenthal, Attorney General, State of Connecticut; Mr. Edward
Yingling, President and CEO, American Bankers Association; Mr. Travis B. Plunkett, Legislative
Director, Consumer Federation of America; Honorable Peter Wallison, Arthur F. Burns Fellow in
Financial Policy Studies, American Enterprise Institute; Mr. Sendhil Mullainathan, Professor of
Economics, Harvard University.
Regulating Hedge Funds and Other Private Investment Pools
Wednesday, July 15, 2009
Witnesses
Panel 1: Mr. Andrew J. Donohue, Director of the Division of Investment Management, U.S. Securities
and Exchange Commission.
Panel 2: Mr. Dinakar Singh, Founder and Chief Executive Officer, TPG Axon Capital; Mr. James
Chanos, Chairman, Coalition of Private Investment Companies; Mr. Trevor R. Loy, General Partner,
Flywheel Ventures; Mr. Mark B. Tresnowski, Managing Director and General Counsel, Madison
Dearborn Partners, LLC; Mr. Richard Bookstaber, Financial Author; Mr. Joseph Dear, Chief
Investment Officer, California Public Employees‘ Retirement System.
Preserving Homeownership: Progress Needed to Prevent Foreclosures
Thursday, July 16, 2009
Witnesses
Panel 1: Honorable Herbert M. Allison, Jr., Assistant Secretary for Financial Stability, U.S.
Department of the Treasury; Honorable William Apgar, Senior Advisor to the Secretary for Mortgage
Finance, U.S. Department of Housing and Urban Development.
Panel 2: Ms. Joan Carty, President and CEO, The Housing Development Fund in Bridgeport, CT; Ms.
Mary Coffin, Head of Mortgage Servicing, Wells Fargo; Ms. Diane E. Thompson, Of Counsel, National
Consumer Law Center; Mr. Allen Jones, Default Management Executive, Bank of America Home
Loans; Mr. Curtis Glovier, Managing Director, Fortress Investment Group; Mr. Paul S. Willen, Senior
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Economist and Policy Advisor, Federal Reserve Bank of Boston; Mr. Thomas Perretta, Consumer, State
of Connecticut.
Establishing a Framework for Systemic Risk Regulation
Thursday, July 23, 2009
Witnesses
Panel 1: Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Honorable Mary
Schapiro, Chairman, U.S. Securities and Exchange Commission; Honorable Daniel K. Tarullo,
Member, Board of Governors of the Federal Reserve System.
Panel 2: Ms. Alice Rivlin, Senior Fellow, Economic Studies, Brookings Institution; Dr. Allan H.
Meltzer, Professor of Political Economy, Tepper School of Business, Carnegie Mellon University; Mr.
Vincent Reinhart, Resident Scholar, American Enterprise Institute; Mr. Paul Schott Stevens, President
and CEO, Investment Company Institute.
Regulatory Modernization: Perspectives on Insurance
Tuesday, July 28, 2009
Witnesses: Mr. Travis B. Plunkett, Legislative Director, Consumer Federation of America; Mr. Baird
Webel, Specialist in Financial Economics, Congressional Research Service; Professor Hal Scott,
Nomura Professor of International Financial Systems, Harvard Law School; Professor Martin Grace,
James S. Kemper Professor of Risk Management, Department of Risk Management and Insurance,
Georgia State University.
Protecting Shareholders and Enhancing Public Confidence by Improving Corporate Governance
Wednesday, July 29, 2009
Witnesses: Ms. Meredith B. Cross, Director of the Division of Corporate Finance, U.S. Securities and
Exchange Commission; Professor John C. Coates IV, John F. Cogan, Jr. Professor of Law and
Economics, Harvard Law School; Ms. Ann Yerger, Executive Director, Council of Institutional
Investors; Mr. John J. Castellani, President, The Business Roundtable; Professor J.W. Verret,
Assistant Professor of Law, George Mason University School of Law; Mr. Richard C. Ferlauto,
Director of Corporate Governance and Pension Investment, American Federation of State, County and
Municipal Employees.
Strengthening and Streamlining Prudential Bank Supervision
Tuesday, August 4, 2009
Witnesses
Panel 1: Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Honorable John C.
Dugan, Comptroller of the Currency, Office of the Comptroller of the Currency; Honorable Daniel K.
Tarullo, Member, Board of Governors of the Federal Reserve System; Mr. John Bowman, Acting
Director, Office of Thrift Supervision.
Panel 2: Honorable Eugene A. Ludwig, Chief Executive Officer, Promontory Financial Group;
Honorable Richard S. Carnell, Associate Professor, Fordham University School of Law; Honorable
Martin N. Baily, Senior Fellow, Economic Studies, The Brookings Institution.
Examining Proposals to Enhance the Regulation of Credit Rating Agencies
Wednesday, August 5, 2009
Witnesses
Panel 1: Mr. Michael S. Barr, Assistant Secretary-Designate for Financial Institutions, U.S. Department
of the Treasury.
Panel 2: Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia University Law
School; Dr. Lawrence J. White, Leonard E. Imperatore Professor of Economics, New York University;
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Mr. Stephen W. Joynt, President and Chief Executive Officer, Fitch Ratings; Mr. James Gellert,
President and CEO, Rapid Ratings; Mr. Mark Froeba, Principal, PF2 Securities Evaluations, Inc.
Alleged Stanford Financial Group Fraud: Regulatory and Oversight Concerns and the Need for
Reform
Monday, August 17, 2009
Witnesses
Panel 1: Mr. Craig Nelson, Investor, Stanford Securities, Alabama; Mr. Troy Lillie, Investor, Stanford
Securities, Louisiana; Ms. Leyla Wydler, Former Vice President Financial Advisor, Stanford Financial
Group; Professor Onnig Dombalagian, George Denegre Professor of Law, Tulane University Law
School.
Panel 2: Ms. Rose Romero, Regional Director, U.S. Securities and Exchange Commission; Mr. Daniel
M. Sibears, Executive Vice President, Member Regulation Programs, Financial Industry Regulatory
Authority (FINRA).
Oversight of the SEC‘s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to
Improve SEC Performance
Thursday, September 10, 2009
Witnesses
Panel 1: H. David Kotz, Esq., Inspector General, U.S. Securities and Exchange Commission.
Panel 2: Mr. Harry Markopolos, Chartered Financial Analyst and Certified Fraud Examiner; Robert
Khuzami, Esq., Director, Division of Enforcement, U.S. Securities and Exchange Commission; John
Walsh, Esq., Acting Director, Office of Compliance Inspections and Examinations, U.S. Securities and
Exchange Commission.
Helping Homeowners Avoid Foreclosure
Monday, September 21, 2009
Witnesses
Panel 1: Honorable Shaun Donovan, Secretary, U.S. Department of Housing and Urban Development.
Panel 2: Honorable Anne Milgram, Attorney General of New Jersey; Ms. Marge Della Vecchia,
Executive Director, New Jersey Housing and Mortgage Finance Agency; Ms. Phyllis Salowe-Kaye,
Executive Director, New Jersey Citizen Action Board; Mr. Mario Vargas, Executive Director, New
Jersey Puerto Rican Action Board; Mr. Edward Heaton, Homeowner from Springfield, New Jersey; Mr.
Bryan Bolton, Senior Vice President, Loss Mitigation, CitiMortgage.
Emergency Economic Stabilization Act: One Year Later
Thursday, September 24, 2009
Witnesses
Panel 1: Honorable Herbert M. Allison, Jr., Assistant Secretary for Financial Stability (TARP), U.S.
Department of the Treasury.
Panel 2: Honorable Neil M. Barofsky, Special Inspector General, Troubled Asset Relief Program; Mr.
Gene L. Dodaro, Acting Comptroller General, United States Government Accountability Office;
Professor Elizabeth Warren, Chair, Congressional Oversight Panel for the Troubled Asset Relief
Program.
Strengthening and Streamlining Prudential Bank Supervision
Tuesday, September 29, 2009
Witnesses: Honorable Eugene A. Ludwig, Chief Executive Officer, Promontory Financial Group;
Honorable Martin N. Baily, Senior Fellow, Economic Studies, The Brookings Institution; Honorable
Richard S. Carnell, Associate Professor, Fordham University School of Law; Mr. Richard Hillman,
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Managing Director, Financial Markets and Community Investment, U.S. Government Accountability
Office.
International Cooperation to Modernize Financial Regulation
Wednesday, September 30, 2009
Witnesses: Ms. Kathleen L. Casey, Commissioner, U.S. Securities and Exchange Commission; Mr.
Mark Sobel, Acting Assistant Secretary for International Affairs, U.S. Department of the Treasury;
Honorable Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve System.
Securitization of Assets: Problems and Solutions
Wednesday, October 7, 2009
Witnesses: Professor Patricia McCoy, George J. & Helen M. England Professor of Law, University of
Connecticut School of Law; Mr. George P. Miller, Executive Director, American Securitization Forum;
Mr. Andrew Davidson, President, Andrew Davidson & Co.; Mr. J. Christopher Hoeffel, Executive
Committee Member, Commercial Mortgage Securities Association; Dr. William Irving, Portfolio
Manager, Fidelity Investments.
Future of the Mortgage Market and the Housing Enterprises
Thursday, October 8, 2009
Witnesses
Panel 1: Mr. Edward J. DeMarco, Acting Director, Federal Housing Finance Agency.
Panel 2: Mr. William Shear, Director, Financial Markets and Community Investment, U.S. Government
Accountability Office; Mr. Andrew Jakabovics, Associate Director for Housing and Economics, Center
for American Progress Action Fund; Dr. Susan M. Wachter, Worley Professor of Financial
Management, Wharton School of Business, University of Pennsylvania; Honorable Peter Wallison,
Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute.
Restoring Credit to Manufacturers
Friday, October 9, 2009
Witnesses: Mr. David Andrea, Vice President, Industry Analysis and Economics, Motor and Equipment
Manufacturers Association; Mr. Robert C. Kiener, Director of Member Outreach, Precision Machined
Products Association; Mr. Stephen P. Wilson, Chairman and CEO, LCNB National Bank.
Examining the State of the Banking Industry
Wednesday, October 14, 2009
Witnesses: Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Honorable John
C. Dugan, Comptroller of the Currency, Office of the Comptroller of the Currency; Honorable Daniel
K. Tarullo, Member, Board of Governors of the Federal Reserve System; Honorable Deborah Matz,
Chairman, National Credit Union Administration; Mr. Timothy T. Ward, Deputy Director,
Examinations, Supervision, and Consumer Protection, Office of Thrift Supervision; Mr. Joseph A.
Smith, North Carolina Commissioner of Banks and Chairman, Conference of State Bank Supervisors;
Mr. Thomas J. Candon, Deputy Commissioner, Vermont Department of Banking, Insurance, Securities
and Health Care Administration, National Association of State Credit Union Supervisors.
The State of the Nation‘s Housing Market
Tuesday, October 20, 2009
Witnesses
Panel 1: Honorable Johnny Isakson (R-GA).
Panel 2: Honorable Shaun Donovan, Secretary, U.S. Department of Housing and Urban Development.
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Panel 3: Ms. Diane Randall, Executive Director, Partnership for Strong Communities; Mr. Ronald
Phipps, First Vice President, National Association of Realtors; Mr. Emile J. Brinkmann, Chief
Economist and Senior Vice President for Research and Economics, Mortgage Bankers Association; Mr.
David Crowe, Chief Economist, National Association of Home Builders.
Dark Pools, Flash Orders, High Frequency Trading, and Other Market Structure Issues
Wednesday, October 28, 2009
Witnesses
Panel 1: Honorable Edward Kaufman, United States Senator.
Panel 2: James A. Brigagliano, Esq., Co-Acting Director of the Division of Trading and Markets, U.S.
Securities and Exchange Commission; Mr. Frank Hatheway, Senior Vice President and Chief
Economist, NASDAQ OMX; William O'Brien, Esq., Chief Executive Officer, Direct Edge; Mr.
Christopher Nagy, Managing Director of Order Routing Sales & Strategy, Ameritrade; Mr. Daniel
Mathisson, Managing Director and Head of Advanced Execution Services, Credit Suisse; Mr. Robert C.
Gasser, President and Chief Executive Officer, Investment Technology Group; Mr. Peter Driscoll,
Chairman, Security Traders Association; Mr. Adam C. Sussman, Director of Research, TABB Group.
Protecting Consumers from Abusive Overdraft Fees: The Fairness and Accountability in Receiving
Overdraft Coverage Act
Tuesday, November 17, 2009
Witnesses: Mr. Mario Livieri, Consumer, State of Connecticut; Mr. Michael D. Calhoun, President,
Center For Responsible Lending; Mr. Frank Pollack, President and CEO, Pentagon Federal Credit
Union; Mr. John Carey, Chief Administrative Officer, Citibank NA; Ms. Jean Ann Fox, Director of
Financial Services, Consumer Federation of America.
Hearing on the nomination of The Honorable Ben S. Bernanke
Thursday, December 3, 2009
Witnesses: The Honorable Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve
System.
Prohibiting Certain High-Risk Investment Activities by Banks and Bank Holding Companies
Tuesday, February 2, 2010
Witnesses: Honorable Paul Volcker, Chairman, President‘s Economic Recovery Advisory Board;
Honorable Neal S. Wolin, Deputy Secretary, U.S. Department of the Treasury.
Implications of the ‗Volcker Rules‘ for Financial Stability
Thursday, February 4, 2010
Witnesses: Mr. Gerald Corrigan, Managing Director, Goldman Sachs; Professor Simon Johnson,
Ronald A. Kurtz Professor of Entrepreneurship, Sloan School of Management, Massachusetts Institute of
Technology; Mr. John Reed, Retired Chairman, Citigroup; Professor Hal Scott, Nomura Professor of
International Financial Systems, Harvard Law School; Mr. Barry L. Zubrow, Executive Vice President,
Chief Risk Officer, JPMorgan Chase.
Equipping Financial Regulators with the Tools Necessary to Monitor Systemic Risk
Friday, February 12, 2010
Witnesses
Panel 1: Honorable Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve System.
Panel 2: Honorable Allan I. Mendelowitz, Founding Member, Committee to Establish the National
Institute of Finance; Professor John C. Liechty, Associate Professor of Marketing and Statistics, Smeal
College of Business, Pennsylvania State University; Professor Robert Engle, Stern School of Business,
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New York University; Mr. Stephen C. Horne, Vice President, Master Data Management and Integration
Services, Dow Jones Business & Relationship Intelligence.
Restoring Credit to Main Street: Proposals to Fix Small Business Borrowing and Lending Problems
Tuesday, March 2, 2010
Witnesses
Panel 1: Honorable Carl Levin (D-MI), United States Senator; Honorable Debbie Stabenow (D-MI),
United States Senator.
Panel 2: Mr. Arthur Johnson, Chairman and CEO, United Bank of Michigan, Grand Rapids, MI on
behalf of the American Bankers Association; Mr. Eric Gillett, Vice Chairman and CEO, Sutton Bank,
Attica, OH on behalf of the Independent Community Bankers Association; Mr. Raj Date, Executive
Director, Cambridge Winter Center for Financial Institutions Policy.
VII. COMMITTEE CONSIDERATION
The Committee on Banking, Housing, and Urban Affairs met in open session on March 22, 2010, and by
a vote of 13-10 ordered the bill reported, as amended.
VIII. CONGRESSIONAL BUDGET OFFICE COST ESTIMATE AND
REGULATORY IMPACT STATEMENT
(Pending)
IX. CHANGES IN EXISTING LAW (CORDON RULE)
On March 22, 2010 the Committee unanimously approved a motion by Senator Dodd to waive the Cordon
rule. Thus, in the opinion of the Committee, it is necessary to dispense with the requirement of section 12
of rule XXVI of the Standing Rules of the Senate in order to expedite the business of the Senate.
X. MINORITY VIEWS
(Pending)
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